Earnings season is in full swing, with many tech stocks reporting earnings in the past few weeks. With so many companies announcing their latest financial results, it might be hard to decide which companies are the best ones to buy right now. If you are suffering from analysis paralysis and don't know where to deploy cash right now, you might want to consider Twilio (TWLO 3.22%) and Datadog (DDOG 1.76%).
Both companies shattered analyst estimates, and they also made announcements that could make the coming decade fruitful for investors. However, both stocks are substantially off their all-time highs, with Twilio being down 57%. At these lowered prices, it could be a good time to invest.
Bringing businesses and consumers closer together
Twilio's messaging services to help businesses engage more with their customers have been adopted by more companies than you might think. If a political organization or nominee has encouraged you to vote, or a delivery driver has texted you about your food, you have likely used Twilio. Its messaging services work to create the ultimate customer experience for businesses, but it also helps them aggregate data to personalize a customer's experience.
These operations are critical for any business that has a toe in the digital space -- so almost every business -- and that shines through the company's fourth quarter. Twilio's revenue grew 54% year over year to $843 million, which is especially impressive given the tough comparables the business had. Twilio gets lots of business from political organizations that want to reach voters, and the U.S. presidential election took place in Q3 and Q4 of 2020, so Twilio had a bump in the year-ago period from peaked activity. The company also grew its customer base 16% from this period to 256,000, which is also impressive considering the tough year-over-year comparisons.
That wasn't all that investors liked, however. The company has historically focused on growth at all costs, rather than profitability, which has resulted in net losses. In 2021, the company lost $950 million and its free cash flow was negative $102 million. The company has over $5.3 billion in cash and securities on the balance sheet, so these losses are not a viable concern for the company, but it announced in its fourth quarter that it plans to become profitable on a non-GAAP (adjusted) basis in 2023. The company's growth is finally going to start paying off, and long-term investors should be excited about that.
Twilio's valuation has been crushed in line with its share price, but that does not mean this business is down and out. Rather, the future of this business seems to look strong. Management noted that it expects organic revenue growth -- which is growth excluding acquisitions it may make -- to be above 30% for the next three years. With shares trading at less than 12 times sales -- a low valuation compared to most tech and software-as-a-service companies -- 30% organic growth and higher total growth for the foreseeable future could mean that shares are wildly undervalued today.
An innovation extraordinaire
Datadog serves as an eye in the sky for over 18,800 developers, helping them monitor application uptime, security, and performance. It is one of the leading platforms in the application management space according to Gartner's (IT 1.45%) Magic Quadrant, and to maintain this lead the company announced numerous product roll-outs in Q4.
Datadog is known for its continuous innovation and implementation of new products, and that did not stop this quarter after it announced one new product and an appealing acquisition. The acquisition of CoScreen will allow developers to troubleshoot and monitor applications collaboratively, and Data Scanner -- Datadog's new product – can allow customers to search for, detect, and protect sensitive data in application logs.
This nonstop innovation is resulting in rapid expansion of customer relationships. Naturally, with more products on offer, customers are adopting more of them and becoming more integrated into the Datadog ecosystem. Thirty-three percent of customers use four or more products and 10% use more than six, compared to 22% and 3%, respectively, in the year-ago quarter. With increased adoption, the company has continued to grow revenue at breakneck paces. This quarter, revenue grew 84% year over year, and that is after it grew 56% year over year in Q4 2020.
The company isn't planning on stopping this trend of innovation. It brought in over $250 million in free cash flow, which will likely go toward investing in its research and development to create new products, partnerships to expand the utility of the platform, and its artificial intelligence engine, Watchdog. At 34 times forward sales, the company's valuation is not cheap. However, Datadog looks poised to continue seeing customer expansion and growth, which is why I love Datadog today.