Artificial Intelligence (AI) is a pivotal technology, with McKinsey & Company's research predicting that by 2030 70% of global enterprises will implement AI.
Understandably, shares of AI-driven, accelerated-computing giant Nvidia (NASDAQ: NVDA) are up by nearly 200% in 2023 despite a slight dip in the last few weeks. However, given the company's current valuation of 33 times its past year's sales, the stock's potential future growth seems to be mostly priced in.
Instead, investors might wish to consider two other stocks: Datadog (DDOG 4.95%) and SentinelOne (S 1.70%), which are not only less expensive but also are at the forefront of the ongoing AI transformation. Here's why these stocks could post solid gains in the coming months.
Datadog
Cloud-native observability and cybersecurity player Datadog's shares are up by over 21% so far in 2023 despite some share price weakness in the past few weeks.
This software-as-a-service (SaaS) company helps organizations seamlessly monitor the diverse elements of their technology infrastructure such as servers, databases, software, hardware, user interfaces, and containers. By pooling together diagnostic data, the company helps clients detect pain points and anomalies and remediate them before they cause significant damage.
The recent integration of the Datadog platform with Bits AI, an AI-powered co-pilot, is further helping organizations quickly identify and rectify issues without significant manual intervention. The company has also introduced a new observability tool for large language model developers to monitor the models' cost and accuracy.
A Leader in the 2023 Gartner Magic Quadrant for application performance monitoring and observability for three consecutive years, Datadog has been adding new customers as well as cross-selling and upselling to existing customers at a healthy clip. The number of the company's high-value clients (those spending over $100,000 or more as annual recurring revenue) grew by 24% year-over-year to 2,990 at the end of 2023's second quarter.
The company's trailing 12-month dollar-based net retention rate (NRR) was 120% at the end of the second quarter. While this is lower than the NRR of 130% posted during the height of the pandemic due to clients increasingly scrutinizing their tech stacks and focusing on efficiency, it is still a healthy number. NRR above 100% shows that the company is raking in more revenue from a given customer cohort compared to that earned from the same cohort in the previous year.
Datadog's revenue soared by 25% year-over-year to reach $509 million, while adjusted earnings per share (EPS) was up by 50% year-over-year to $0.36 in the second quarter. While the company is not profitable on a generally accepted accounting principles (GAAP) basis, it is free-cash-flow positive.
With a target addressable market estimated to be worth $62 billion by 2026 and an annual run rate of less than $2 billion, Datadog's stock is well-positioned to grow rapidly in the coming months.
SentinelOne
A prominent AI-driven cybersecurity player, SentinelOne has seen its shares rise 14% so far this year, and there are several reasons why the stock could go even higher in the coming months.
Instead of opting for multiple security solutions and consoles from different vendors, clients are increasingly preferring SentinelOne's unified security platform, which provides autonomous protection through a single console in areas such as cloud, endpoints, and identity. This is proving to be a major plus point for the company, and is reflected in its customer acquisition and retention trends.
SentinelOne's customer count grew by 30% year-over-year to over 11,000 at the end of the second quarter of its fiscal 2024 (ending July 31, 2023). The number of customers spending over $100,000 annually on the company's offerings also grew by 37% year-over-year to 994. SentinelOne's second-quarter net retention rate of 115% was also impressive and highlighted the success of the company's cross-selling strategies, despite macro challenges and the inclusion of legacy products from the Attivo Networks acquisition causing some near-time weakness in sales.
The company is also leveraging generative AI to enable clients to reduce human intervention and improve efficacy and efficiency in operating cybersecurity software. To that effect, it has introduced Purple AI, a product that uses a variety of large language models to help significantly automate activities such as threat hunting, analysis, and remediation. Currently in the beta testing phase, if effective, this product could prove to be a game-changer for the company.
The stock has been facing significant turbulence in the past few quarters, mainly due to macro headwinds, sales delays, and unmet quarterly expectations. However, the company seems to be finally returning to growth based on its second-quarter performance. Revenue grew by 46% year-over-year to $149.4 million, ahead of the consensus estimate of $141.5 million. Simultaneously, the company's focus on cost efficiency has helped reduce its adjusted net loss to $0.08, from $0.20 in the same quarter of the prior year.
SentinelOne's has also revised its annual revenue projections for fiscal 2024, now set at an ambitious $600 million, up from the previously estimated $595 million. Considering the improving adoption of its robust unified cybersecurity platform, generative AI capabilities, and improving financials, now might be an opportune time for astute investors to consider this stock.
