The Nasdaq Composite is heavily weighted toward the technology sector, and that tends to make the index volatile. For instance, the Nasdaq is currently 31% off its high, while the broad-based S&P 500 is down just 17%. But there is also a silver lining to its tech-heavy nature. Despite falling more sharply of late, the Nasdaq has easily outperformed the S&P 500 over the past decade because it includes many innovative and potentially disruptive companies, and those companies can create tremendous value for patient shareholders.
Airbnb (ABNB 1.09%) and Datadog (DDOG -2.68%) fit that description. Both businesses are on the cutting edge of their respective industries, yet the challenging economic environment has sent shares of Airbnb and Datadog tumbling 53% and 64%, respectively, from their highs. But the economy will eventually rebound, and both stocks could soar when that happens.
Here's what investors should know.
Airbnb: A disrupter in the travel and tourism industry
Airbnb has become a powerhouse in the travel and tourism industry. It currently ranks as the second-most-visited website in the accommodation and hotels category, behind Booking.com by Booking Holdings, and it ranked as the fourth-most-downloaded travel app worldwide last year, according to Apptopia. That success stems from its asset-light business model.
Traditional hospitality companies spend millions of dollars (over several months or years) to build hotels, but Airbnb sources rental properties from a network of more than 4 million hosts. That makes Airbnb much more efficient. It takes minutes to onboard a new host, and it costs far less than building a hotel. Airbnb can also target marketing content at potential hosts in high-demand destinations to build its inventory on short notice, and it can target marketing content at potential guests in high-supply destinations to utilize its inventory more efficiently.
Building on that idea, Airbnb has also added features like flexible search parameters and search categories (e.g., beachside, amazing pool, luxury) that have transformed its platform into a recommendation engine. Flexible search allows Airbnb to surface relevant properties for guests who are flexible on where and when they travel, while search categories allow guests to find very specific accommodations in locations they may have never considered. Those features undoubtedly create value for guests, but they also help Airbnb use its inventory more efficiently.
In a nutshell, Airbnb is an asset-light travel and tourism company, and the financial benefits of its business model are evident in its financial results. Third-quarter revenue climbed 29% to $2.9 billion and free cash flow (FCF) soared 81% to $960 million, representing an impressive FCF margin of 33%. For context, Booking Holdings generated negative FCF of $96 million on $6.1 billion in revenue in the most recent quarter, and Marriott International generated $800 million in FCF on $5.3 billion in revenue, which is equivalent to an FCF margin of 15%.
Airbnb is well positioned to grow its business. Management values its addressable market at $3.4 trillion, and the company has demonstrated an admirable capacity for innovation. That quality should keep Airbnb at the forefront of the travel and tourism industry. And with shares trading at 8.3 times sales, a discount to the three-year average of 18.1 times sales, now is a good time to buy this growth stock.
Datadog: A leader in observability software
Datadog specializes in IT monitoring and cloud security. Its platform provides real-time insight into the health and performance of applications and infrastructure, which helps businesses avoid costly downtime in critical systems. It also supports collaboration among development, security, and operations teams, a practice known as DevSecOps, which improves business agility in areas like incident response and product development.
A few facets of the Datadog platform make it particularly compelling. First, it comes with over 600 pre-built integrations that make deployment simple. Second, it addresses a broad range of observability use cases. In fact, Datadog was the first company to combine metrics, traces, and logs (known as the "three pillars of observability") on a single platform. Third, its powerful artificial intelligence engine can predict performance issues and automate root cause analysis, accelerating time to resolution.
In a nutshell, the Datadog platform is both easy to use and powerful, and that combination has garnered praise from industry analysts. In the past year, Datadog has been recognized as a leader in multiple observability categories, including application performance monitoring, database monitoring, and cloud infrastructure monitoring.
Not surprisingly, those accolades have come alongside impressive financial results. Third-quarter revenue climbed 61% to $437 million and non-GAAP (adjusted) earnings soared 77% to $0.23 per diluted share.
And Datadog is set to maintain that momentum. Management estimates its market opportunity will reach $62 billion by 2026, and that figure should continue to climb, simply because modern businesses depend on an ever-growing number of software products and cloud services. More broadly, Datadog is a pioneer and an innovator in the observability software space, and those qualities should keep the company in growth mode for years to come.
Currently, shares trade at 15.8 times sales, a discount compared to the three-year average of 38.9 times sales. That's why this Nasdaq stock is worth buying.
