The stock market hasn't been easy to navigate this year. There haven't been many places to hide, particularly for technology investors, with the Nasdaq-100 index shedding 27% of its value year to date. So, what should an investor do at a time like this?
First, it's critical to maintain a long-term focus. History is proof that the broader market always recovers to new highs, given enough time. But investors can also watch what the professionals are buying, particularly those who have achieved billionaire status. That's why three Motley Fool contributors think Apple (AAPL 1.27%), Datadog (DDOG 0.50%), and Okta (OKTA -0.65%) need to be on everybody's watch lists ahead of the new year.
Betting big on America's largest company
Anthony Di Pizio (Apple): He's widely considered as one of the greatest investors ever, so it seems fitting that Warren Buffett, through his investment company Berkshire Hathaway, would own shares in Apple, America's largest company. But to take things a step further, Apple has become Berkshire's biggest holding and it has regularly increased its position throughout the year.
Berkshire was most recently a buyer of Apple in the second quarter of 2022, and it now holds 915 million shares, a stake worth over $135 billion. In the recent third quarter, Berkshire also made a first-time bet on Taiwan Semiconductor Manufacturing stock -- curiously, Apple is that company's largest customer. It uses Taiwan Semi to manufacture the chips that power its portfolio of devices, so the move could be interpreted as an indirect bet on Apple's success.
But what is it about Apple that Buffett finds so attractive? The company sells products that consumers love, it's highly profitable, and it has returned a significant amount of money to shareholders, which flows directly into Berkshire's coffers. In fact, Apple returned over $104 billion to shareholders during fiscal 2022 (ended Sept. 24) alone through dividends and stock buybacks.
The company's fiscal 2022 results were a little sluggish in aggregate thanks to the slowing economy, with revenue growing by just 7.8% year over year. But there was some robust growth beneath the surface during the fourth quarter specifically, with Mac sales jumping by 25%, wearables by 9.8%, and iPhone by 9.6%. All of those segments caught a boost from Apple's September product launch, which revealed the next generation AirPods, the Apple Watch Ultra, and the iPhone 14.
Apple's services segment, which includes Apple Music, Apple News, and Apple Pay, will remain in focus during 2023 as it's the fastest-growing and most profitable part of Apple's business. But for now, the consumer electronics giant is finding a way to tread water in one of the most difficult economies in recent memory, and that sets up a great opportunity if the broader environment improves in the new year.
The company that keeps on growing
Jamie Louko (Datadog): Datadog has caught the eye of one of the most famous investors in the world: Stanley Druckenmiller. Druckenmiller bought almost 790,000 shares during the second and third quarters, totaling $82 million invested in this application and performance monitoring platform. He's so confident in Datadog that it is now his ninth-largest holding.
It's not surprising that Datadog has caught his eye because the company has been posting stellar results this year. While many software companies have seen demand plummet, customers continue to buy Datadog's tools. In Q3, revenue soared 61% year over year to $437 million. Datadog's cash flow has also continued to shoot higher: Trailing 12-month free cash flow reached $364 million, which is 45% higher than the year-ago period.
Datadog's stable results during this uncertain time should be no surprise. The company's application performance monitoring tools are vital to customers. Imagine running a business without understanding user behavior, reducing application downtime, and monitoring infrastructure performance. That would be pretty hard, right? Datadog provides these tools to 22,200 customers, and considering these abilities are always needed, no matter the economic environment, Datadog has continued to see stable adoption.
According to Gartner's Magic Quadrant, Datadog is the leader in this space. This is likely due to its large (and growing) product suite. The company has over 35 tools, with more likely to come. This makes Datadog the one-stop shop for all application monitoring, performance, and security needs. Given how much free cash flow the company is generating, it will be able to continue investing heavily in product innovation to maintain its top-dog status.
Druckenmiller doesn't seem too concerned with the company's high valuation of 64 times free cash flow, given how high-quality the business is. He is willing to load up on shares now, and you might want to consider doing the same.
The leader in identity and access management
Trevor Jennewine (Okta): Billionaire hedge fund manager Israel Englander tripled his stake in Okta in the third quarter, and he has increased his position fivefold since the beginning of 2022. That buying spree is especially noteworthy because Okta's share price has plunged 70% this year, evidencing Englander's confidence in the company.
Okta specializes in a branch of cybersecurity known as identity and access management (IAM). Its platform leans on artificial intelligence to authenticate users based on context like device, location, and behavior. It then authorizes users based on the permissions granted to them by administrators, ensuring that only the right people can access sensitive applications and data.
In November, IT research company Gartner named Okta a leader in access management, citing more robust product capabilities and a greater ability to execute than any other vendor, including tech titan Microsoft. That recognition highlights the power of neutrality. Whereas Microsoft has a clear incentive to steer customers toward its own cloud infrastructure, Okta engineered its software to be compatible across private data centers, public clouds, and hybrid environments.
Additionally, Okta addresses workforce and customer identity use cases. Its platform integrates with more than 7,000 applications and IT infrastructure providers, allowing businesses to secure products from vendors like Salesforce or even Microsoft. But Okta also provides developer tools that allow businesses to embed identity into custom software. Collectively, its neutrality and broad utility have propelled Okta to the forefront of the IAM market.
The company recently reported solid third-quarter results. Its customer count increased 22% to 17,050, and the average customer spent 22% more over the past year. In turn, revenue climbed 37% to $481 million, and Okta reported non-GAAP (adjusted) earnings of $0.00 per diluted share, a slight improvement from a non-GAAP loss of $0.07 per diluted share in the prior year.
Investors have good reason to be optimistic. IAM is a crucial component of zero-trust security, and digital transformation has made effective cybersecurity an imperative for virtually every business. Okta estimates its addressable market at $80 billion, leaving a long runway for growth. And with shares trading at 6.1 times sales -- a bargain compared to the three-year average of 27.2 times sales -- now is a good time to buy a few shares of this growth stock.
