Investor sentiment has rebounded substantially from its bear-market lows in late 2022, driving all three major U.S. financial indexes higher in the first half of 2023. But the Nasdaq Composite recorded a particularly astonishing return of 31.7%, notching its best first half since 1983.
Yet the technology-heavy index remains 15% below its high, and buying opportunities still exist for patient investors. Here's why PayPal Holdings (PYPL 1.61%) and Datadog (DDOG 3.19%) are worth buying today.
NASDAQ: PYPL
Key Data Points
1. PayPal
PayPal delivered a beat-and-raise performance in the first quarter. Revenue increased 9% to $7 billion and non-GAAP net income soared 33% to $1.17 per diluted share. Those solid results came on the heels of a revised growth strategy that shifted focus from attracting new users to better engaging existing users. And the particularly strong bottom-line growth shows that cost-cutting initiatives are beginning to pay off.
Looking ahead, PayPal expects that momentum to continue. Management is now guiding for non-GAAP earnings growth of 20% in 2023, up from its previous estimate of 18%. But investors should be particularly excited about the long-term tailwinds behind the business. PayPal is the most accepted digital wallet in North America and Europe, and digital wallets are expected to take share online and offline in the coming years, while paper payments, credit cards, and debit cards are expected to lose share.
E-commerce should be a particularly strong tailwind for PayPal. The company holds a 42% market share in online payment processing, more than double its closest competitor Stripe, and investors have good reason to believe PayPal can maintain its leadership. Not only has the company cultivated considerable brand authority with consumers -- PayPal was the second-most-downloaded digital wallet in the world last year -- but it also partnered with Amazon to make Venmo a payment option at checkout. That's significant because Amazon is the most-visited online marketplace in the world, and Venmo was the third-most-downloaded digital wallet in the U.S. in 2022.
Here's the bottom line: Retail e-commerce sales are expected to grow at 13.6% annually through 2030, so it's not unreasonable to assume PayPal -- the market leader in online payment processing -- could grow revenue at a similar pace, especially since digital wallets are projected to take share from other checkout options. Assuming PayPal can grow revenue in the low double digits, its current valuation of 2.7 times sales looks fairly cheap. That's why this fintech stock is worth buying right now.
NASDAQ: DDOG
Key Data Points
2. Datadog
Datadog specializes in observability and security software for development, operations, and security teams. Its platform unifies more than a dozen products that help businesses resolve performance and security issues across their IT ecosystems. Datadog simplifies deployment with more than 600 prebuilt integrations, and its artificial intelligence engine accelerates problem resolution by automating tasks like anomaly detection, incident alerting, and impact analysis.
Despite tough competition, Datadog has managed to distinguish itself as a leader in several observability software verticals. In June 2022, consultancy Gartner recognized Datadog as a leader in application performance monitoring, citing its broad product portfolio and analytics capabilities as key strengths. In December 2022 Forrester Research recognized the company as a leader in artificial intelligence for IT operations, noting that "Datadog leads the pack in data insights and visualizations." And in June 2023 research company G2 recognized its leadership in database monitoring, log monitoring, and network monitoring software.
Datadog delivered a strong financial performance in the first quarter. Its customer count increased 29% to 25,500, and its net retention rate stayed above 130%, meaning the average customer upped its spending by more than 30%. In turn, first-quarter revenue climbed 33% to $482 million and non-GAAP net income increased 17% to $0.28 per diluted share. Investors have good reason to believe that momentum will continue in the future.
The company has displayed a remarkable capacity for innovation throughout its history. Datadog's first product addressed infrastructure monitoring, but it expanded into application monitoring in 2017, log management in 2018, and user experience and network monitoring in 2019. It then branched into incident response in 2020, cloud security and database monitoring in 2021, and cost management and cloud service monitoring in 2022. Datadog's capacity for innovation should keep it on the cutting edge of the industry in the future.
Management says continuous product development, coupled with a growing need for observability and security software, will push its market opportunity to $62 billion by 2026. And with the shares trading at 17.3 times sales, a discount to the three-year average of 37.2 times sales, investors should buy a small position in this growth stock right now.
