Last year wasn't a great year for Nasdaq stocks. In fact, the Nasdaq 100 had its worst year since 2008, logging an annual total return of negative 32% in 2022. Yet some stocks performed far worse than the average.
For example, Lucid Group and Rivian Automotive both declined 82%, Atlassian plunged by 66%, and social media leader Meta Platforms shed 64%.
So, when sorting through the wreckage, are there any dogs of the Nasdaq 100 that are actually diamonds in the rough? I say yes: Align Technology (ALGN -0.78%) and Datadog (DDOG -3.94%).
Image source: Getty Images.
1. Align Technology
Down roughly 68% in 2022, Align Technologies was one of the worst-performing stocks in the Nasdaq 100. After experiencing sizzling growth during earlier phases of the COVID-19 pandemic, Align is enduring what now looks like a brutal hangover.
The maker of custom cosmetic dental products has missed consensus earnings estimates in its last three quarterly reports, and revenue has declined 12% year over year. As was the case for many pandemic stocks, the period's unusual macroeconomic conditions created a sugar high -- followed by an upset stomach.
In 2021, Align's year-over-year revenue growth vaulted to an eye-popping 187% -- a level that was never sustainable. With so much of the world stuck at home -- and communicating with co-workers via video calls -- people eagerly snapped up Align's Invisalign products. Yet, that pull forward in demand hurt Align's top and bottom lines in 2022. Adding to Align's problems was the surging U.S. dollar. With nearly half of its sales occurring outside of the U.S., the company estimates negative foreign exchange impacts totaled $57 million in the third-quarter of 2022 alone.
Nevertheless, the company's business model remains solid. After all, a person's smile is one of the first things we notice and Align's products help orthodontists scan, plan, and treat patients' teeth. Align utilizes advanced scanning technology and 3D printing to custom-mold and produce retainers that perfectly fit its patients' teeth. What's more, Align is still early in its growth phase. The company has served over 21 million customers in North America, Europe, and Asia -- but it estimates there are over 500 million potential customers for its products.
Meanwhile, from a valuation standpoint, Align looks attractive. Its enterprise-value-to-revenue ratio stands at 4.7 -- its lowest level since 2013. Its forward price-to-earnings multiple of 29.3 is almost half of its two-year average forward P/E of around 49.
ALGN PE Ratio (Forward) data by YCharts
Moreover, a weakening dollar and normalizing demand should help the company grow earnings again in 2023. Wall Street expects Align to earn $7.89 per share in 2023, up roughly 11% from 2022. And for shareholders, there's also the potential for a takeover. With Align's valuation sitting near its multiyear lows and a market cap of only $17 billion, there's a chance that some large healthcare company could decide to gobble it up.
So, for investors who are willing to ride out a few more months of rocky sailing in exchange for long-term upside, Align Technology looks like a good choice.
Image source: Getty Images.
2. Datadog
After its initial public offering in September 2019, cloud-computing software stock Datadog ripped higher over the next two years before crashing back to Earth in 2022. Shares fell by roughly 59% last year, placing Datadog among the Nasdaq 100's biggest losers.
At the same time, Datadog's fundamentals have held up remarkably well. The company continues to grow revenue at a blistering pace. In the third quarter, sales jumped 61% year over year and gave it a trailing 12-month total of $1.5 billion.
Behind the staggering growth is a core business that continues to benefit from the massive growth of cloud computing. Datadog is a software-as-a-service company that sells access to modules that help organizations better manage their cloud applications, data, and workflow.
As of Sept. 30, the company had more than 22,000 customers, and about 2,600 of those customers were generating at least $100,000 in annual recurring revenue for Datadog. In fact, most of its clients are paying for multiple modules: 80% use two or more modules; 40% use four or more; and 16% use six or more.
Another key metric for Datadog is its dollar-based net retention rate, which stands at 130%. That means its established customers increased their spending with it by an average of 30% year over year.
DDOG Gross Profit (TTM) data by YCharts.
Datadog's gross profit for the past 12 months stands at $1.2 billion, with gross margins of around 79%. And while the company has yet to achieve consistent profitability, it is generating around roughly $364 million of free cash flow.
With a secular growth tailwind at its back, I think Datadog is a screaming buy. Long-term investors should take notice.
