Inflation came in hotter than expected in August, prompting the Federal Reserve to raise interest rates by 75 basis points for the third consecutive time. Those events sent an already-battered stock market deeper into bear market territory. The tech-heavy Nasdaq Composite is now 32% off its high, and the broader S&P 500 is down 23%.
While those losses are painful, patient investors know downturns are an opportunity to buy. The stock market has never failed to recover in the past, and there is no reason to think this bear market is any different.
Here are two growth stocks I'd buy now without hesitation.
Datadog: A leader in application performance monitoring and observability
In 2018, Datadog (DDOG -1.43%) became the first company to combine the three pillars of observability -- metrics, traces, and logs -- with the introduction of its log management product. It has since continued to innovate, and its platform now comprises a broad range of monitoring and security tools that help businesses protect and prevent downtime in applications, networks, and infrastructure.
Among other advantages, Datadog benefits from a powerful network effect. Its platform processes more than 10 trillion signals each day from across its customers' IT ecosystems, and each data point makes its artificial intelligence (AI) models better at predicting and identifying performance issues. Its platform also features over 500 pre-built integrations that reduce friction and accelerate time to value for customers.
Those virtues have helped Datadog establish itself as a key vendor of observability software. In fact, research company Gartner recently recognized Datadog as the leader in the market for application performance monitoring and observability, citing its broad portfolio and AI engine as key strengths.
Datadog grew its customer base 29% over the past year, and the average customer increased spend by more than 30%. In turn, revenue climbed 79% to $1.4 billion and free cash flow soared 168% to $354 million. But investors have good reason to believe that monster momentum will continue.
Datadog puts its addressable market at $53 billion by 2025, and the company is innovating rapidly to capitalize on that opportunity. For instance, it recently launched Audit Trail, a service that helps businesses meet compliance requirements. The company also extended its database monitoring product to support Microsoft SQL Server (the third-most-popular database worldwide) and Azure Database Platform.
Currently, shares trade at 20.5 times sales, a discount to its three-year average of 38.2 times sales, but still a pricey valuation. That said, Datadog is a high-quality business that is growing exceptionally quickly, and businesses like that often warrant a premium valuation. That is why I'd buy this growth stock without hesitation.
Cloudflare: A leader in content delivery and edge development
Cloudflare (NET -1.05%) operates a global edge cloud that accelerates and protects business-critical applications and infrastructure. Its platform essentially makes the internet faster and safer, while freeing customers from the cost and complexity of managing network hardware in private data centers.
Tech giants Amazon and Microsoft dominate the cloud computing industry, but Cloudflare has still managed to distinguish itself through product innovation and performance. Its edge cloud interconnects with 11,000 other networks -- including every major internet service provider, cloud vendor, and enterprise -- which make it exceptionally fast. In fact, internal tests suggest that Cloudflare is actually the fastest cloud provider in North America, Australia, Japan, most of South America, and most of Europe. That advantage has helped it become the leading content delivery network, according to business software reviewer G2 Grid.
Cloudflare has further differentiated itself with its Workers development platform, a suite of tools that empower businesses to build fast and secure applications and websites directly on its edge cloud. In the fourth quarter of 2021, Forrester Research recognized Cloudflare as the leader in edge development, citing a stronger current product and a better growth strategy. And Cloudflare has since continued to showcase its capacity for innovation, as it recently debuted R2 Storage for unstructured data and announced D1 (a SQL database) for structured data. Both products should reinforce its leadership in edge development by extending the utility of its Workers platform.
Turning to financial performance, Cloudflare continued to wow investors with rapid growth over the past year. Its customer count increased 20% and the average customer spent 26% more. In turn, revenue rose 53% to $813 million and the company generated $36 million in cash from operations. That meager cash flow might seem concerning, but management plans to run the business at breakeven for the foreseeable future, citing its massive market opportunity.
On that note, Cloudflare puts its total addressable market at $135 billion by 2024, leaving a long runway for growth. And with shares trading at 21.5 times sales -- an absolute bargain compared to the three-year average of 41.5 times sales -- I would not hesitate to buy this growth stock today.
