The Nasdaq Composite has been in a downward tailspin for the better part of the past year, and macroeconomic concerns pushed the index into bear market territory during the first quarter. But some of the wealthiest investors have treated the downturn as a buying opportunity.
For instance, billionaire Israel Englander of Millennium Management added to his position in The Trade Desk (TTD -0.97%) in the first quarter, while billionaires John Overdeck and Ron Baron increased their stakes in Datadog (DDOG -2.56%).
Since then, both stocks have continued to fall. That's got some investors wondering why these billionaires are buying these growth stocks.
1. The Trade Desk
The Trade Desk specializes in digital advertising. Its artificial intelligence-powered platform helps advertisers plan, measure, and optimize targeted campaigns across digital channels, including desktop, mobile, and connected television (CTV).
Last year, research company Gartner once again recognized The Trade Desk as an industry leader, alongside Alphabet's Google and Amazon. But as an independent company -- meaning it does not own media properties -- The Trade Desk benefits from a less-biased business model. For instance, Alphabet has reason to steer ad buyers toward its own inventory on Google Search and YouTube, and Amazon has reason to steer ad buyers toward its inventory on the Amazon marketplace and Fire TV. The Trade Desk isn't subject to those conflicts of interest.
That advantage has helped drive rapid growth. In the past year, The Trade Desk saw revenue climb by 44% to $1.3 billion, and free cash flow (FCF) jumped 12% to $394 million. Better yet, investors have good reason to believe that growth will continue. Digital advertising is quickly approaching an addressable market of $1 trillion, and The Trade Desk is gaining momentum in shopper marketing and CTV advertising.
The world's largest retailer, Walmart, recently selected The Trade Desk to power its ad tech platform. The partnership will blend purchase data from Walmart with technology from The Trade Desk, allowing marketers to target campaigns and measure the results against online and in-store sales. That move could propel The Trade Desk to the forefront of the $200 billion shopper marketing industry.
More recently, Disney struck a similar deal with The Trade Desk. The media giant will make its data available through The Trade Desk's ad tech platform, allowing marketers to launch personalized campaigns across Disney's linear and digital video channels. That development is especially noteworthy because Disney plans to launch an ad-supported tier of Disney+ by the end of the year, and The Trade Desk is now well positioned to benefit.
In light of that momentum, this growth stock does indeed look like a smart investment.
Datadog specializes in monitoring and observability. Its cloud platform ingests, indexes, and analyzes trillions of data points each day, and its artificial intelligence engine Watchdog uses those signals to identify security threats and performance issues in real time across applications, networks, and infrastructures. That allows businesses to identify and resolve technical problems quickly, ensuring a good user experience for employees and customers.
In June, Gartner recognized Datadog as a leader in the application performance monitoring and observability market, citing a better ability to execute than any other vendor. Gartner specifically mentioned that Watchdog's ability to predict events and automate root cause analysis was a key differentiator.
Datadog offers over 500 built-in integrations that make adoption easy, and its broad portfolio of performance monitoring and security software has become the foundation of a successful land-and-expand strategy. In fact, net revenue retention has exceeded 130% for the past 19 quarters, meaning the average customer is upping their spend by more than 30% each year.
At the same time, Datadog saw its customer base rise 30% to 19,800 over the past year, and that compounding dynamic -- more customers and growing spend per customer -- has fueled strong financial results. Revenue soared 78% to $1.2 billion over the past year, and FCF shot up 210% to $336 million.
Looking ahead, shareholders have good reason to be bullish on this company. Digital transformation projects will generate even more data in the future, and businesses will need to monitor that data for performance and security issues. Datadog believes that it will create a $53 billion addressable market by 2025, and the company's strong market presence should help it capitalize on that opportunity.
Currently, the stock trades at 23 times sales -- far cheaper than the three-year average of 39 times sales -- which makes this a good time to buy a few shares.