In the realm of high-growth tech stocks, separating quality companies from average ones can be difficult. Many fantastic businesses have sold off recently due to their association with high-growth, unprofitable stocks with unrealistic expectations. Three deserving more respect than what they are receiving are Shopify (SHOP 0.86%), MercadoLibre (MELI 1.52%), and Datadog (DDOG 3.99%).
While these businesses don't consistently make a profit, each is close to breaking that barrier. Additionally, all three reported great results during the third quarter and are primed to disclose more of the same in the fourth.
Image source: Getty Images.
1. Shopify
A longtime small-business enabler, Shopify has begun shifting its focus to capturing larger customers. Consumers expect slower delivery times and a mediocre product-return system when dealing with small businesses, as they understand these retailers don't have the resources of larger entities. But businesses like Fitbit or Red Bull must deliver a top-tier experience for their customers. Shopify is satisfying this need by expanding its warehouse network so it can provide two-day shipping and easy returns.
Shopify derives 70% of revenue from its merchant solutions segment, which takes a slice of every transaction processed through its software. It makes sense for it to focus on larger retailers because bigger brands equal more sales, and thus more revenue for Shopify.
But it isn't leaving small businesses behind. During the third quarter, it launched Shopify Markets, a tool helping businesses expand across borders by tailoring solutions to fit each country's culture. This allows operations of all sizes to expand their footprint across borders.
Only once in Shopify's history on the public markets has it retracted this much from its all-time high.
SHOP data by YCharts.
With its stock down nearly 50% from its high, it shows how fearful investors are, but as Warren Buffett likes to say, "Be fearful when others are greedy and be greedy when others are fearful." E-commerce isn't going anywhere, and Shopify is poised to report a great fourth quarter, previewed by its great Black Friday and Cyber Monday sales, which were up 23% year over year on the platform.
By attracting larger customers, Shopify will be able to keep growing and maybe match or exceed its 46% third-quarter revenue growth when it reports earnings on Feb. 16. (Corporate Event Data provided by Wall Street Horizon.)
2. MercadoLibre
Latin American e-commerce is dominated by one company, MercadoLibre. Through its commerce site, payments ecosystem, and logistics division, it is providing the luxury of online shopping in a region with more than 635 million people.
On its e-commerce site, MercadoLibre processed 30% more gross merchandise volume (GMV) year over year in the third quarter (period ending Sep. 30) and its Mercado Pago payment platform was used in 96% of those transactions. Of the items sold, its Mercado Envios shipping division played some part in delivering 86% of items shipped to customers, and 80% of all volume was delivered in two days.
MercadoLibre is the undisputed Latin American e-commerce king, and its 73% year-over-year revenue growth in Q3 reflects that. But the market is valuing it like its growth is over.
MELI P/S ratio. Data by YCharts.
Valued at less than nine times sales (price to sales ratio), MercadoLibre has only reached this threshold a few times over the past five years. With the growing middle class across Latin America, MercadoLibre will benefit from increased discretionary spending. Having several tailwinds blowing in its favor, it is poised to outperform the market over the next few years.
3. Datadog
Businesses can choose from hundreds of cloud solutions, if not thousands, to boost employee productivity and provide great customer experiences. But monitoring how the software is functioning as well as maintaining servers and other applications can be a hassle for IT teams.
Datadog's offering lets companies oversee how all their systems are interacting, and it can spot anomalies as they occur. A distinguishing factor from other software-as-a-service companies is that Datadog is industry agnostic and serves customers in multiple fields.
Many companies are adopting Datadog's software, demonstrated by its 75% year-over-year revenue growth. While management didn't give an exact dollar-based net retention rate, it did say the figure remained above 130%, meaning customers spent at least $0.30 more for every dollar this quarter versus last. Much of this growth is driven by customers using more products.
| Percentage of Customers Using Multiple Products | ||
|---|---|---|
| Product Usage | Q3 2021 | Q2 2020 |
| Two or more products | 77% | 71% |
| Four or more products | 31% | 20% |
Source: Datadog.
With Datadog announcing more than 10 new products at its annual user conference, it has plenty of room to expand with its customers.
The stock trades at an expensive 53 times sales even after dropping nearly 25% from its all-time high. But it trades at such a high level because of its execution and strong business outlook. Investors must understand this risk when investing in Datadog, but if the company achieves its mission, its shareholders will benefit along the way.
The outlook
After a tumultuous month in the market, fourth-quarter earnings have the potential to shake it up even more. While I'm positive each of these three companies will have strong results to share, I have no clue how the market will react after each company reports.
Still, each one has a bright future. Buying the stocks now with the mindset of holding them for three to five years should allow investors to ride out any market-induced volatility. Shopify, MercadoLibre, and Datadog all look like strong buys right now, and their shares are conveniently on sale.
