No matter how volatile stocks are in the short term, valuations always matter eventually. This is especially true during a bear market. When fear and uncertainty are collectively heightened, investors tend to seek out businesses that are profitable on a recurring basis and cheap.
However, "cheap" is a subjective term that can change based on sector and industry, whether we're in a bull or bear market, and what the Federal Reserve is doing regarding its monetary policy.
Likewise, valuation isn't solely determined by the price-to-earnings (P/E) ratio. Although the P/E ratio can be useful for identifying pricey stocks, not all stocks are necessarily expensive when examined in combination with other valuation metrics.
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For example, while the following three high-growth stocks are "expensive" using the traditional P/E ratio, they're a lot cheaper than you probably realize when their growth rates and forward-year earnings are factored in.
CrowdStrike Holdings
The first "pricey" stock that's fairly inexpensive when you factor in its growth rate is cybersecurity company CrowdStrike Holdings (CRWD -3.90%). Despite trading at 85 times trailing-12-month (TTM) earnings, CrowdStrike's forward-year P/E ratio of 43.8 (based on Wall Street's consensus) and projected sales growth rate of 29.2% makes it reasonably priced.
The best thing about cybersecurity is that it's become something of a basic-necessity service. No matter how poorly the U.S. economy is performing, hackers and robots are always trying to access sensitive data. Since CrowdStrike runs a software-as-a-service (SaaS) subscription model, it means the company can expect highly predictable cash flow.
The company's cloud-based Falcon security platform is what makes it tick. On top of being cloud native and nimbler than virtually all on-premises security solutions, Falcon relies on artificial intelligence (AI) and machine-learning to grow smarter over time. In a typical week, it'll oversee trillions of unique events, each of which makes Falcon more capable of recognizing and responding to potential threats over time.
The testament to a great business is whether customers stick around and add on to their additional purchases. In both respects, CrowdStrike gets a passing grade. Even though its SaaS software is pricier than a lot of its competition, the company's gross retention rate has climbed from 93% to roughly the 98% range over the past five years.
What's more, existing clients are continuing to add on to their initial purchases. While growing subscribers from 450 to north of 23,000 in six years is impressive, the fact that 62% of the current 23,000-plus clients have purchased at least five cloud-module subscriptions is far more important. SaaS software subscriptions often boast high margins, which can allow CrowdStrike's earnings growth to outpace its already stellar sales growth.
BioMarin Pharmaceutical
A second expensive growth stock that really isn't that pricey once you move beyond the traditional P/E ratio is ultra-rare-disease drugmaker BioMarin Pharmaceutical (BMRN -1.60%). Despite a TTM P/E ratio of 121, BioMarin's forward-year P/E of 30.2 and its expected growth rate of 25.9% in 2024 make it downright cheap for a biotech stock.
Similar to CrowdStrike, BioMarin benefits from its highly defensive operating model. As much as we'd like to get sick only when it's financially convenient to do so, we have no control over which ailment(s) we develop or when we become ill. For drug developers, device makers, and healthcare service providers, it means a relatively steady, predictable stream of cash flow in any economic environment.
To build on this point, BioMarin Pharmaceutical is focused on a number of ultra-rare indications. While there's certainly risk involved with targeting smaller patient pools, there's plenty of reward for successful clinical studies. In addition to improving the lives of patients with rare diseases, BioMarin rarely faces any pushback on its list prices from insurers, and competition for ultra-rare-disease therapeutics tends to be minimal (or nonexistent).
BioMarin currently has seven approved brand-name drugs that accounted for more than $2 billion in net product sales last year. The one with the most intriguing growth prospects is Voxzogo, which is an injection given to children with achondroplasia aged five years and older that aids in their growth.
As of the end of January 2023, 1,264 children globally were being treated with Voxzogo. While that many not sound like a lot of patients, sales for this key drug are expected to double in 2023 to between $330 million and $380 million.
Wall Street and investors are also closely eyeing BioMarin's Biologics License Application for Roctavian, which is under review by the U.S. Food and Drug Administration (FDA) and has an expected action date of no later than June 30, 2023. BioMarin has submitted three years of follow-up data for its gene therapy to treat severe hemophilia A in adults and remains hopeful it'll be given the green light by the FDA. In combination with Europe, BioMarin expects between $100 million and $200 million in sales this year from Roctavian.
If all goes well, Voxzogo and Roctavian can increase BioMarin's annual sales by close to 50% (around $1 billion in additional sales) between 2022 and 2024.
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Datadog
The third growth stock that appears expensive on the surface but is considerably cheaper once you dig in is SaaS-driven infrastructure and application monitoring company Datadog (DDOG -3.94%). Although its TTM P/E ratio of 67 might appear high, the company's forward-year P/E ratio of 43.5 and growth rate of 28.8%, according to Wall Street, makes its valuation quite palatable.
Although Datadog's real-time unified data platform has been streamlining businesses for more than a decade, it's the COVID-19 pandemic that really accelerated its growth potential. More people than ever are choosing to work remotely, which makes application performance monitoring, digital experience monitoring, and cloud security all the more important. This permanent shift in the labor market is increasing Datadog's total addressable market in observability, which now stands at $62 billion for 2026.
To add to the above, enterprise cloud spending is still arguably in its infancy. Whereas cloud spending as a percentage of global information technology (IT) spending was approximately 8% in 2021, cloud spending is projected to be closer to 20% of worldwide IT spend by 2026. Datadog's operating results demonstrate the role it's playing in helping businesses migrate into the cloud.
But if there's one number that really stands out when reviewing Datadog's operating performance, it's the company's ability to land the big fish. Having approximately 23,200 customers is great -- but growing the numbers of clients with at least $1 million in annual recurring revenue (ARR) has been Datadog's ticket to recurring adjusted profits and sustained sales growth. It ended 2022 with 317 customers generating $1 million in ARR, which is up 47% from the previous year and has more than tripled since the end of 2020.
Likewise, Datadog is having a lot of success upselling to its existing customers. In just two years, the percentage of its clients using four or more of its products has practically doubled (22% to 42%), while those using six or more products has increased sixfold from 3% to 18%. If this trend continues, Datadog's already reasonable valuation will become all the more attractive.
