The Nasdaq-100 index is home to 100 of the largest technology companies listed on the Nasdaq stock exchange. After recording a miserable loss of 33% in 2022, it's off to a hot start this year with a 21% gain so far this year.
But that's very much in keeping with history. The Nasdaq-100 has only declined in consecutive years on one occasion, and that was during the dot-com tech bust from 2000 to 2002. Every other annual loss since the index's inception in 1986 has been followed by a strong rebound the next year.
In fact, the Nasdaq-100 has averaged a whopping 52% return in bounce-back years (excluding the dot-com period), which implies it still has plenty of room to run higher in the remainder of 2023. If history does repeat, here's a growth stock that investors might want in their portfolio.
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The cloud is powering a shift in consumer habits
The way we shop has changed forever. Thanks to cloud computing, businesses can operate websites and digital applications for a minuscule cost. They no longer need to own the physical infrastructure; they can simply rent powerful data centers maintained by providers like Alphabet's Google Cloud or Microsoft Azure.
Managing brick-and-mortar physical stores is now optional for most businesses because they can reach a global customer base through their digital channels. But that does come with challenges. It can be difficult to determine what thousands of faceless customers have experienced online, and since it's so easy for them to jump across to a competitor, the business might not be aware a customer is unsatisfied until sales are already lost.
That's where Datadog (DDOG 0.96%) comes in. It has developed a cloud monitoring platform that serves as a guardian to a company's online assets. If there's a technical problem with a sales channel that is hurting the user experience, Datadog picks it up and notifies the operator immediately, before customers are affected. That's especially important because some issues might only be present in one specific geographic location, which the business might never detect if not for a tool like Datadog.
The platform isn't just for retailers, though. Datadog serves game developers, entertainment companies, manufacturers, and even the government. In fact, at the end of the first quarter of 2023, it had 25,500 customers, including 2,910 that were spending at least $100,000 per year. As cloud adoption grows, so will demand for the company's platform.
Datadog delivered stellar Q1 financial results
Last year, Datadog was one of just a handful of companies consistently increasing its financial guidance in the face of an incredibly difficult economy. That momentum carried into the first quarter of 2023.
First, it delivered revenue of $481.7 million, which was a 33% year-over-year jump, and comfortably beat its $470 million forecast. The company would have earned an additional $5 million in revenue if not for a service outage it experienced in March.
As a result, Datadog increased its guidance for the 2023 full year; it now expects to deliver as much as $2.1 billion in revenue, up from its previous estimate of $2.09 billion.
The company attributes the quarter's success to its new customer additions and the continued expansion of its product portfolio. It says there are now 5,000 businesses using its cloud security products, which include advanced threat detection and observability.
Datadog also noted a growing opportunity in artificial intelligence (AI). As a company that relies on mass volumes of data to deliver insights to businesses, it believes it's uniquely positioned to train AI models to help solve its customers' problems. While this effort is still in its early stages, the company says it expects to reveal further AI-based initiatives in the future.
Here's why Datadog stock is a buy right now
Datadog stock remains 60% below its all-time high following the broader sell-off in the technology sector throughout 2022. The company is now valued at about $25 billion, and based on its trailing-12-month revenue of $1.8 billion, its stock trades at a price-to-sales (P/S) ratio of 13.6.
Given the breadth of Datadog's product portfolio, it's a hybrid company that can be difficult to value. But it's a long way from its peak P/S multiple of 53, and it's currently close to cybersecurity leader CrowdStrike Holdings, which has a P/S ratio of 12.5. On the other hand, it's quite a bit more expensive than data-streaming company Confluent, which trades at a multiple of 10.
But valuation aside, Wall Street is overwhelmingly bullish on Datadog stock. Of the 37 analysts tracked by The Wall Street Journal, 21 have given it the highest-possible buy rating. A further seven are in the overweight (bullish) camp, while nine recommend holding. Not a single analyst recommends selling.
Datadog has a growing product portfolio and a growing addressable market. It's consistently adding big-spending customers, and increasing its revenue guidance has almost become a habit. A further improvement in market conditions could be the missing ingredient before the stock climbs toward its all-time high, so investors might do well to have it in their portfolio if history does repeat for the Nasdaq-100 this year.
