2 Growth Stocks Down 54% and 68% to Buy Hand Over Fist

The Nasdaq-100 market index is where investors turn for a sense of how the technology sector is doing, and -- spoiler alert -- it's not having a great year. The index has lost 27.2% of its value during 2022, placing it firmly in bear market territory with many individual tech stocks faring even worse.

For short-term investors, it's horrible news. But for long-term investors, the steep drop presents a potential opportunity to put their money to work buying stock in rapidly growing companies at a steep discount. After all, history suggests the broader markets always recover to new highs, given enough time. To have the best odds of generating positive returns when the market does turn around, good stock selection is key.

Today, we will discuss two businesses that make the most of their cloud-powered digital operations and operate in an industry that will be in high demand for the foreseeable future. You may want to consider buying their stocks hand over fist.

1. Datadog: Down 52.5% from its all-time high

Datadog (DDOG -2.68%) stock is down 52.5% from its all-time high, largely because of macroeconomic factors hitting so many tech and growth stocks right now. It's certainly not a reflection of the company's operating performance, which has been stellar. 

Companies are constantly shifting more of their operations online using cloud technology and are generating truckloads of data each time a customer interacts with them. While that data can appear noisy on the surface, there are actually mountains of value waiting to be unlocked with proper analysis. That's where Datadog comes in. 

It helps organizations draw unique, actionable insights from user data on digital platforms, like websites and mobile applications. In some cases, this analysis can indicate whether customers are having a positive experience down to an individual level. Occasionally, a company's users in specific geographic locations or who are using certain mobile devices will encounter issues that don't affect the rest of the customer base and management can miss the problem. Datadog helps the client company ensure these are alerted and resolved within minutes.

In its most recent quarter, Datadog said it had 2,420 customers spending at least $100,000 with the company annually, a total that's up 54% year over year. The customers range from financial services companies to game developers, highlighting how digital transformation is affecting so much of the economy.

Datadog management expects revenue will grow 58% for the 2022 full year and total $1.63 billion. The company is also on the cusp of full-year profitability. After losing $20.7 million in 2021, it has generated $4.8 million in GAAP net income in the first half of 2022. 

As an added bonus, Wall Street analysts are very bullish on Datadog stock, and not a single one who's tracked by The Wall Street Journal is recommending owners sell the stock.

2. DigitalOcean: Down 68.5% from its all-time high

While Datadog helps companies extract the most out of their cloud operations, DigitalOcean (DOCN -0.54%) is responsible for putting them there in the first place. It's a specialist in delivering cloud services to small- to mid-sized organizations with under 500 employees, which the company believes is a segment of the market that large providers like Amazon Web Services and Microsoft Azure often neglect. 

So DigitalOcean does compete against trillion-dollar giants, but it does so by going after customers that don't feel the big guys offer the right services at the right price. This has helped DigitalOcean sign on more than 600,000 customers by delivering personalized service, simple deployment mechanisms, and affordable pricing suited to businesses that tend to be more in the start-up phase of their operations. Around 105,400 of DigitalOcean's customers spend at least $50 per month and account for the majority of the company's revenue, which totaled $492 million over the last four quarters.

DigitalOcean could be entering a major growth phase because management thinks the company could generate $1 billion in annual revenue by 2024. The company is steadily growing into its addressable market, which it estimates is worth $72 billion this year but could double to $145 billion in 2025. That suggests there's still a significantly large runway for this company to expand further. 

DigitalOcean's stock price is down 68.5% from all-time highs set in November 2021. It has suffered amid the broader sell-off in the technology sector, but also because it's an unprofitable company that investors perceive as high risk at the moment. But in reality, a company with an opportunity as large as DigitalOcean's should invest as much as possible in growth and aim for profits at a later date, once it achieves scale. 

It does have a strong balance sheet with over $1.1 billion in cash and marketable securities, so it can comfortably navigate this period, having lost only $6 million in the most recent quarter.

Buying DigitalOcean stock might be a long-term bet worth making, especially because it's available now at a price-to-sales ratio of just 9.1, which is near the cheapest level since it listed on the public markets more than a year ago.