2 Red-Hot Growth Stocks to Buy in 2023 and Beyond

Uncertainty in the economy has not left growth stocks unscathed. Even though many of these stocks made a significant recovery in the first half of 2023, they sell well below their peaks from the previous bull market. Some have also fallen back again as enthusiasm from the first half of the year starts to subside.

Nonetheless, a few of these stocks continue to grow at rapid rates. As conditions improve, the current slowdown could give investors an opportunity to buy them at a discount while they await a recovery. To this end, stocks such as Datadog (DDOG 0.34%) and Snowflake (SNOW 0.39%) show such potential.

Datadog

Datadog offers its clients a platform for monitoring applications, databases, servers, and other critical parts of an entity's IT infrastructure.

Its software has facilitated data transformation, allowing customers and employees to aggregate data to a dashboard, leading to an improved digital experience as IT personnel can identify issues more efficiently. Datadog continues improving in areas such as generative AI, security, developer experiences, and cost management.

Customers also continue to spend more on the platform -- 82% of Datadog's customers use two or more products, up from 79% in the year-ago quarter. Also, about 3,000 of its customers have an ARR of $100,000 or more as the number of high-value customers increased 24% over the last year.

That increased business boosted revenue in the first half of 2023. Revenue of $991 million rose 29% year over year. While this lags the 63% annual growth in 2022, the company continues to expand at a fast pace.

Still, rapid growth in operating expenses hit the bottom line. Consequently, the company reported a $28 million net loss in the first half of 2023, down from a $5 million profit in the year-ago period.

Also, the company forecasted $2.06 billion in revenue at the high end of its range for 2023. That 22% increase from 2022 levels means Datadog's top-line growth continues to slow.

But despite that pullback, the stock is up 25% year to date. And while its price-to-sales (P/S) ratio of 15.5 may seem elevated, the sales multiple is only slightly above multi-year lows. Datadog stock also sells at a discount of over 50% from its 2021 high.

Moreover, economic performance is cyclical, increasing the likelihood of a recovery in growth over time. That factor could make this an excellent time to add shares as investors wait for a recovery.

Snowflake

Snowflake provides a data cloud product that stands out for its interoperability and growing capabilities. It allows entities to store, protect, and monitor the use of their data, keeping it in a central repository.

Snowflake's platform provides an advantage over competing products from Amazon, Microsoft, and others in that it can fully integrate regardless of the infrastructure provider. It has also leveraged AI and machine learning. To this end, its Snowpark toolset allows for data transformation and manipulation, providing libraries customers can use for machine learning tasks.

With this growth, the company now claims more than 8,500 customers as of the end of the second quarter of fiscal 2024 (ended Jul. 31), rising 25% over the last year.

Such increases propelled revenue for the first half of the fiscal year to $1.3 billion, rising 41% year over year. That figure accounts for a net revenue retention rate of 142%, meaning existing customers increased spending on the platform 42% from the previous year.

Unfortunately for Snowflake, operating expense growth exceeded that of revenue. That caused net losses for the first six months of fiscal 2024 to increase to $453 million, versus $389 million in the prior-year period.

Furthermore, Snowflake expects fiscal 2024 product revenue (about 95% of total revenue) growth to slow to 34%. Such news has contributed to a flat performance for the cloud stock in 2023 with shares up just 5% so far this year.

But while that places its P/S ratio at 20, its sales multiple is still near an all-time low for Snowflake. Additionally, a flat stock performance coupled with massive revenue growth should push that valuation lower.

As investors look to profit from the data cloud, it should bode well for Snowflake stock as more companies look to protect and better utilize their data sets.