Many growth stocks were crushed over the past few months as rising rates drove investors toward safer blue chip plays. However, that brutal sell-off has also compressed the valuations of the market's priciest growth stocks to more sustainable levels -- so investors who can stomach the near-term volatility might find some great bargains in this tough market.
Today, I'll review three high-growth tech stocks that could still be worth buying this year: Zscaler (ZS -1.37%), Datadog (DDOG -1.48%), and JFrog (FROG -1.19%).
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1. Zscaler
Zscaler's cloud-native platform secures networks with "zero trust" tools which treat everyone -- even "trusted" employees -- as potential threats. As a cloud-based service, it eliminates the need for on-site appliances. This lightweight approach is easier to scale as an organization expands.
When Zscaler went public in 2018, it served roughly 2,800 customers and approximately 10% of the Global 2000. Today, it serves more than 5,600 customers and over a quarter of the Global 2000.
Its revenue rose 56% year over year to $673 million in fiscal 2021, which ended last July, and it expects 55% to 56% growth in fiscal 2022.
Zscaler isn't yet profitable on a generally accepted accounting principles (GAAP) basis, but its non-GAAP earnings are improving. Its non-GAAP net income rose 86% to $75.7 million in fiscal 2021 as its non-GAAP earnings per share (EPS) increased 73%. It expects its non-GAAP EPS to grow 4% to 8% this year.
In late March, I said I admired Zscaler's business but was hesitant to buy the stock at more than 30 times this year's sales. But today, it trades at a more reasonable 17 times sales. It's not a screaming bargain yet, but its robust growth rates could justify that premium valuation.
2. Datadog
Datadog's platform monitors databases, servers, and apps across an entire organization in real time. It pulls all that data onto unified dashboards, where it can be more easily monitored by IT professionals. This streamlined approach makes it much easier to spot and diagnose problems.
Datadog's number of customers that generated at least $100,000 in annual recurring revenue (ARR) rose 63% to 2,010 year over year in 2021. Its number of customers with at least $1 million in ARR also increased 114% to 214. Its dollar-based net retention rate has also consistently stayed above 130%.
Datadog's revenue surged 70% to $1.03 billion in 2021. Its non-GAAP net income jumped 133% to $167 million and its non-GAAP EPS rose 118%. It also turned profitable on a GAAP basis in the fourth quarter of the year.
It expects its revenue to rise 55% to 57% this year, and for its non-GAAP EPS to grow 46% to 70%. That outlook is impressive, but I was also reluctant to buy the stock at over 30 times sales earlier this year. Today, it trades at 17 times this year's sales -- so it might be the right time to start accumulating some shares of this high-growth software company.
3. JFrog
JFrog's main platform, Artifactory, is a universal repository for automated software updates. Instead of relying on human employees to manually update an organization's software -- which can be buggy, time-consuming, and prone to human error -- Artifactory automatically transfers and applies those updates across a wide range of computing platforms.
JFrog went public in late 2020. Its total number of enterprise customers rose 10% year over year to 6,650 in 2021, and its number of customers that generated more than $100,000 in ARR rose 53% to 537. It also ended the year with an impressive trailing-12-month net dollar retention rate of 130%.
JFrog's revenue rose 37% to $207 million in 2021, and it anticipates 34% to 35% growth in 2022. Its non-GAAP net income declined 80% to $2.7 million in 2021 as its non-GAAP EPS dropped 77%, but that drop was mainly caused by two recent acquisitions. It expects that spending to continue in 2022 and reduce its non-GAAP EPS to nearly break-even levels.
That bottom-line pressure spooked the bulls, but JFrog's gross margins are still expanding. Its stock also looks attractively valued at just 6 times this year's sales, compared with its double-digit price-to-sales ratios a year ago, so it could be a great long-term buy for patient investors.
