Plenty of high-growth cloud stocks skyrocketed in value over the past two years, yet quickly surrendered all those gains this year as rising interest rates drove investors back toward more conservative investments. Those declines were painful for investors who hopped on the bandwagon last year, but they've also created fresh buying opportunities for more patient investors.
So today I'll take a closer look at three cloud stocks that were crushed over the past year, but are now more reasonably valued and primed for parabolic comebacks once the macroeconomic headwinds wane.
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1. Twilio
Twilio's (TWLO 1.84%) cloud-based communication platform handles text messages, voice calls, videos, and other integrated features in mobile apps. Instead of building those features from scratch -- which can be buggy, time-consuming, and difficult to scale as an app gains more users -- developers can outsource the work to Twilio with just a few lines of code.
Twilio established a first-mover advantage in this niche market, and its annual revenue grew at a whopping compound annual growth rate (CAGR) of 59% between 2016 and 2021. However, Twilio has also consistently struggled to turn a profit, and its margins are being squeezed by higher carrier fees (which are charged when mobile apps access their wireless networks). It's also increasingly relied on acquisitions to drive its sales growth.
But despite these near-term challenges, Twilio expects its revenue to grow about 30% organically through at least 2024, and for its gross margins to expand from 49% in 2021 to more than 60% over the long term. If you believe Twilio can achieve those ambitious goals, then its stock looks like a screaming bargain right now at just three times this year's sales.
2. JFrog
JFrog's (FROG 1.62%) main cloud-based platform, Artifactory, is a universal repository that automatically updates an organization's software across multiple computing platforms. That automated approach eliminates the need for time-consuming manual updates and keeps the company secure. Aritfactory's Xray feature also scans a company's entire software infrastructure for various vulnerabilities and security issues.
JFrog went public just two years ago. Its annual revenue rose 44% in 2020 and grew 37% to $207 million in 2021, and it anticipates 35%-36% growth this year. Those growth rates are impressive, but JFrog still isn't profitable by GAAP (generally accepted accounting principles) yet -- and it expects its non-GAAP operating margin to decline this year as it integrates its acquisitions of the product security company Vdoo and the connected device management software company Upswift. Those elevated spending plans spooked investors as interest rates rose.
But after being nearly cut in half over the past 12 months, Jfrog's stock now trades at a more reasonable seven times this year's sales. That's a reasonable price-to-sales ratio if it can maintain an annual growth rate of more than 30%.
3. Datadog
Datadog's (DDOG 1.65%) cloud-based platform pulls diagnostic data from a company's entire network of databases, servers, desktop software, mobile apps, and cloud-based services, then aggregates all of that information into unified real-time dashboards. That streamlined view makes it much easier for IT professionals to diagnose problems.
Datadog went public three years ago, and its annual revenue soared 83% in 2019, grew 66% in 2020, and jumped 70% to $1.03 billion in 2021. It expects its revenue to increase another 56%-58% this year.
Those growth rates are impressive, but Datadog's stock still plunged nearly 50% this year as investors fretted over its declining operating margins, which were squeezed by higher R&D, sales, and marketing expenses. Investors were also concerned about its sequential loss of large customers (meaning those that generated over $100,000 in annual recurring revenue) last quarter, which it blamed on slower spending from e-commerce, food, and delivery companies in a post-lockdown world.
Datadog isn't profitable by GAAP measures yet, but it's stayed profitable by non-GAAP measures since 2020. It expects its non-GAAP EPS to grow 54%-69% for the full year. Its stock still isn't cheap at 18 times this year's sales, but it looks more reasonably valued than it did last year -- and it could command a much higher valuation if the macro situation improves.
