There's little doubt that the best path to long-term wealth generation is investing in quality stocks and holding them for years -- if not decades. While generating even average returns can provide a substantial nest egg, there is a special breed of companies that can ramp up potential returns for investors.
Finding stocks with the winning combination of a best-in-class offering, a large addressable market, and significant secular tailwinds can provide life-changing returns that can help set you up in style. Let's look at three stocks that fit the criteria for game-changing investments that could help set you up for life.
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1. Datadog: Keeping an eye on critical systems
The digital transformation continues, with more businesses than ever adopting cloud computing. In the midst of this evolution, keeping customer-facing systems up and running has never been more critical.
That's where cloud-native monitoring and analytics pioneer Datadog (DDOG 4.95%) comes in. The company's software-as-a-service (SaaS) systems monitor the performance of servers, databases, containers, and front-end systems, all from a convenient dashboard, notifying developers of problems before they reach critical mass. Perhaps as importantly, the system detects anomalies that foreshadow future problems.
Datadog was named a leader in the vaunted 2023 Gartner Magic Quadrant for application performance monitoring and observability, marking the third consecutive year achieving this distinction. The company was similarly identified as a leader in Forrester Research's Wave report for artificial intelligence (AI) for IT operations, noted for its data insights and visualizations.
Even amid the worst downturn in more than a decade, Datadog continued to notch enviable growth. In the second quarter, Datadog's revenue grew 25% year over year to $509 million, while its adjusted earnings per share (EPS) of $0.36 surged 50%. Furthermore, even though the company isn't yet delivering profits on a generally accepted accounting principles (GAAP) basis, it continues to generate strong operating and free cash flow, which shows that its lack of profits is related to depreciation and other noncash items, so profitability is most likely a matter of time.
Its customer metrics help backstop its strong growth, as Datadog's most lucrative customers -- those spending $100,000 or more in annual recurring revenue (ARR) -- climbed 23% year over year.
Datadog's top-notch technology, robust customer growth, and strong financial performance illustrate why the stock is a buy. Additionally, the company has a large addressable market, which will help it continue its upward growth trajectory. Datadog's revenue of $1.67 billion last year is a drop in the bucket compared to its vast market opportunity, which management estimates will climb to $62 billion by 2026.
2. HubSpot: Its CRM technology hits the spot
HubSpot (HUBS -0.78%) is best known for its novel approach to advertising. It pioneered the concept of inbound marketing which attracts potential customers by developing engaging online content (including on social media and blog posts) rather than chasing them.
From those humble beginnings, HubSpot has evolved. The company now offers a wide range of interconnected customer relationship management (CRM) solutions, including marketing, sales, service, content management systems, and operations, with solutions to help manage data, reporting, automation, content, messaging, and even payments.
HubSpot was named a leader in the vaunted 2023 Gartner Magic Quadrant for business-to-business (B2B) marketing automation platforms, marking the third consecutive year with that designation. Furthermore, the company earns 4.4 of 5 stars from Gartner's Peer Insights report, while 82% of reporting customers would recommend its services.
The company's second-quarter results help illustrate its potential. Revenue grew 25% year over year to $529 million, while adjusted EPS of $1.41 tripled. The results were driven by strong customer additions, which grew 23%. The company continued to expand its relationships with existing users, as 33% of customers use three or more Hubs, which generates 50% of annual recurring revenue.
HubSpot's leading technology, expanding customer relationships, and consistent financial performance illustrate the company's bona fides. Then there's its large and growing market opportunity. HubSpot generated revenue of $1.73 billion in 2022, which is just the beginning compared to its growing total addressable market, which management estimates will climb from $51 billion this year to $77 billion by 2028.
3. MongoDB: The future of databases
MongoDB (MDB 4.83%) made a name for itself by upending the traditional database. While most rival solutions are limited to what can fit neatly into rows and columns, MongoDB's cloud-native Atlas platform is much more flexible, handling a wide variety of structured and unstructured data including social media posts, audio and video files, and even entire documents. This provides users with a much more robust database solution and also helps developers facilitate the creation of software and apps.
The company is also on the receiving end of numerous industry accolades. MongoDB was named a leader in the 2023 Gartner Magic Quadrant for cloud database management systems, "the only pure-play application database provider recognized as a leader." The company was also highlighted as a leader in the Forrester Wave report for translytical data platforms, which "represents the growing convergence between transactional, analytical, and streaming systems."
The results for MongoDB's fiscal 2024 second quarter (ended July 31) fill out the rest of the picture. Revenue grew 40% year over year to $424 million, while its adjusted EPS of $0.93 more than tripled. The results were driven by the addition of 8,000 new customers over the past year, up 22%, while those spending $100,000 in ARR increased 27%.
MongoDB generated revenue of $1.28 billion in fiscal 2023, which pales in comparison to its market opportunity, which management expects to grow to $136 billion by 2027.
Data by YCharts
The fine print
It's important to note that in keeping with the high-risk, high-reward nature of these stocks, they also come with a high valuation. MongoDB, Datadog, and HubSpot are selling for 13, 12, and 10 times forward sales, respectively, when a reasonable price-to-sales ratio is between 1 and 2. However, valuation should never be viewed in a vacuum.
Over the past four years, these high fliers have far outpaced the gains of the S&P 500 index, helping illustrate why they deserve a premium. Considering their overall performance, they don't seem nearly that expensive.
