A decade might seem to be a long time to commit to holding onto an investment. However, while it may be difficult to identify which stocks will be winners over such a long period, it is definitely not impossible. In fact, companies capable of capitalizing on secular trends such as artificial intelligence (AI), cybersecurity, and observability can prove to be some of the best candidates for a long-term buy-and-hold strategy.
In my view, three stocks -- Nvidia (NVDA 6.18%), Datadog (DDOG 4.95%), and CrowdStrike (CRWD 2.03%) -- seem to fit the bill.
1. Nvidia
AI has ushered in a transformative technological change. In fact, according to Grand View Research, the AI market is projected to expand at a compound annual rate of 37.3% through the end of this decade, from $196.6 billion in 2023 to $1.8 trillion in 2030.
Nvidia stands out as a dominant player in this market, thanks to its advanced AI chips, closed-source CUDA software ecosystem, and a vast developer community of over 2 million. Recently, the company also introduced Nvidia NeMo SteerLM, a software tool that allows developers to customize the responses of large language models to specific real-time applications. Shares of the company are up by nearly 220% so far this year.
Besides AI, Nvidia is also capitalizing on trends such as cloud computing, gaming, and autonomous driving. The company's robust financials bear testament to its strong fundamentals. In its fiscal second quarter, which ended July 30, its performance was impressive, with revenues growing by 101% year over year to $13.5 billion and GAAP (generally accepted accounting principles) earnings per share growing by 854% to nearly $2.50.
There is no doubt that Nvidia is an expensive stock, trading at nearly 114 times earnings, far more than the semiconductor industry's median earnings multiple of 23.3. However, considering the huge growth potential of AI and the company's formidable position in its industry, this stock may prove to be a lucrative long-term holding.
2. Datadog
Shares of Datadog, a cloud-native observability and cybersecurity powerhouse, have appreciated by close to 21.6% so far this year. With the rapid adoption of cloud-based business tools and applications by enterprises across the world, ensuring seamless connections and data security has become mission-critical.
Datadog helps solve these problems by pooling together diagnostic data across the clients' entire technology stack, including databases, servers, hardware, and software, enabling proactive detection and resolution of issues. The company's services encompass infrastructure monitoring, digital experience monitoring, cloud security, log management, application performance monitoring, and developer experience monitoring. The timely rectification of threats and vulnerabilities, often with only minimal human intervention, helps mitigate potential damage to the clients.
Datadog's broad observability portfolio has played a pivotal role in ensuring the success of its cross-selling and upselling strategy. As of the end of the second quarter, 82% of its clients were using two or more of its products, 45% were using four or more products, and 21% were using six or more products. This illustrates that Datadog has become deeply entrenched in its clients' daily operations -- thereby ensuring a highly sticky customer base.
Recently, Datadog launched Bits AI, an AI-powered co-pilot that is integrated with its core platform. This innovation will further automate and accelerate the identification and resolution of vulnerabilities. Datadog has also introduced another observability tool to help large language model developers monitor the costs and accuracy of those models effectively.
Even at a time when businesses have been optimizing their IT spending, Datadog managed to grow its revenues by 25% year over year to $509 million. While it's not yet GAAP profitable, the company is free-cash-flow positive. Hence, considering its large target addressable market (forecast to be worth $62 billion by 2026), broad and ever-evolving product portfolio, and improving financials, now might be a good time for astute investors to consider this stock.
3. CrowdStrike
With the average cost of a data breach in 2023 surging to $4.45 million, cybersecurity is not a luxury for businesses, but a necessity. So cybersecurity titan CrowdStrike has proven resilient even at a time when many enterprises have been actively cutting down their overall IT spending.
CrowdStrike's Falcon platform harnesses AI and machine learning to combat cyberthreats in areas such as endpoint protection, identity protection, workload protection, cloud security, and observability. Its multi-modular, all-in-one, cloud-native cybersecurity solution is proving to be a game changer for the company -- in part thanks to strong network effects. Falcon's AI-driven Threat Graph intercepts trillions of data signals every week regarding emerging cyberthreats, the system continuously evolves -- making it smarter and more efficient at thwarting these threats. This, in turn, has helped CrowdStrike further cross-sell and upsell to existing clients as well as rapidly attract new customers.
CrowdStrike ended its fiscal 2023 on Jan. 31, 2022, with over 23,019 clients. Further, at the end of fiscal 2024's second quarter, 63% of its subscription customers were using five or more Falcon modules, 41% were using six or more modules, and 24% were using seven or more modules. In fiscal Q2 2024, CrowdStrike also saw an 80% year-over-year jump in deals involving eight or more Falcon modules. These numbers highlight the sticky nature of CrowdStrike's business model.
With CrowdStrike's target addressable market forecast to grow from $76 billion in 2023 to $158 billion in 2026, and Falcon's ability to cater to several critical cybersecurity threats, CrowdStrike is poised for significant growth over the next decade.
