Trading with price-to-sales (P/S) ratios of 18, CrowdStrike (CRWD +0.05%) and The Trade Desk (TTD +2.96%) are home to valuations that don't necessarily scream "buy without any hesitation." Quite frankly, a lot has to go right for these companies to live up to their premium valuations.
However, thanks to their supercharged growth rates and the undeniable megatrends working in their favor, I can't help but keep adding new dollar-cost averaging (DCA) money to these businesses each month.
These supercharged tech stocks are expected to grow revenue by 39% and 25%, respectively, in the upcoming year, and they might be two of the select few deserving of a towering valuation. Here's what makes them so compelling.
1. CrowdStrike used AI before it was trendy
Already the worldwide leader in endpoint security sales -- maintaining a 19% market share -- CrowdStrike has quickly burst onto the cybersecurity scene with its machine learning (ML) and artificial intelligence (AI) powered Falcon platform. In filtering through trillions of cybersecurity events each week on its cloud-based platform, CrowdStrike's AI and ML prowess allows the company to contextualize, identify, eliminate, and learn from potential threats.
For example, the company recently participated in a MITRE Engenuity ATT&CK Evaluation -- which measures an organization's cybersecurity capabilities -- and achieved 100% scores across protection, visibility, and detection. CrowdStrike's perfect results were an industry first, stopping all 13 protection scenarios from an attack that emulated the tactics of a recent Russian-based adversary, Turla.
While the technological jargon of these first few paragraphs shows that a "leap of faith" may be needed to invest in CrowdStrike (unless you're an expert in this area), its financial performance speaks for itself.
Since its 2019 initial public offering (IPO), CrowdStrike has seen sales rise tenfold, with over 50% of the Fortune 500 and 15 of the top 20 U.S. banks becoming customers. Riding this incredible growth, CrowdStrike's share price has easily outperformed the S&P 500 over the last five years.
NASDAQ: CRWD
Key Data Points
CrowdStrike's sales growth is unique because it's driven by a balance between new customers and increased spending from existing ones. In its latest quarter, half of its 37% sales growth came from new customers, while the other half came from existing customers spending more -- as evidenced by its net retention rate of around 120%.
This metric is critical for CrowdStrike investors to watch, as it measures the success of the company's land-and-expand business model. With a net retention rate above 120% for 19 straight quarters, it is safe to say that CrowdStrike is firing on all cylinders, consistently getting customers to add new cybersecurity modules as they grow.
Speaking of new cybersecurity modules, three of CrowdStrike's latest solutions -- cloud, identity, and logscale (observability) -- have been in high demand. Growing by 115% as a group in the most recent quarter, the trio already accounts for one-sixth of CrowdStrike's annual recurring revenue (ARR) despite being the company's newest offerings.
However, these three solutions look particularly promising because management expects them to collectively grow to at least $4.5 billion in revenue in five to seven years. To put this in perspective, that figure is currently 50% higher than CrowdStrike's current total ARR.
Best yet for investors, management is guiding for companywide ARR to rise from $2.9 billion in its most recent quarter to $10 billion over the next five to seven years. With this strong guidance, CrowdStrike's premium-looking valuation could be quickly reeled in, keeping it one of my favorite DCA candidates today.
2. The Trade Desk's Unified ID 2.0 is a win-win-win
The Trade Desk's cloud-based, demand-side platform gives advertisers and brands access to some of the most promising digital advertising inventory. Its omnichannel offering enables connected TV (CTV), mobile, audio, display, and premium video advertising. Focusing on this digital advertising industry, The Trade Desk offers clients over 500 billion daily ad opportunities on its buy-side platform.
NASDAQ: TTD
Key Data Points
One offering that differentiates the company from the competition is its Unified ID 2.0 (UID2) identity solution. This open-source technology converts email addresses or phone numbers to anonymized IDs that represent an upgrade to traditional cookies on the internet. As a nonproprietary solution, UID2 can be used interoperably by anyone across the advertising value chain -- providing valuable data at the customer level while maintaining anonymity.
UID2 will be an attractive way for advertisers to profit from the ongoing shift from linear TV to CTV by providing a more precise way to find and target their best customers. Thanks to the apparent benefits of UID2 to advertisers, publishers are rapidly jumping on the bandwagon to offer their UID2-enabled ad inventory. Over the last few quarters, Warner Bros. Discovery, Peacock, Philo, and Paramount Global have all adopted UID2 and begun integrating it into their streaming platforms.
This creates a win-win situation for advertisers and publishers while strengthening The Trade Desk's position as a leading demand-side platform.
Thanks partly to the virtuous cycle created by UID2's win-win-win for all parties, The Trade Desk continued its incredible growth story with a 25% increase in sales during the third quarter. However, what makes this growth particularly exciting for investors is that U.S. advertising spend and U.S. digital advertising only rose by 5% and 10% during the quarter. This highlights just how rapidly The Trade Desk continues to take market share, further solidifying its leadership position on the digital ad-buying side of the market.
Powered by this recent outperformance versus the broader ad market -- a feat that has been repeatedly demonstrated over the last decade -- The Trade Desk deserves its premium valuation. This is particularly true when we pair this outsized growth with UID2's potential and the fact that The Trade Desk still only generates 13% of its sales from outside North America. With international sales outpacing companywide growth rates over the last three quarters, look for this burgeoning unit to lead the company's growth charge over the coming decades.
As advertisers keep moving ad spend from linear TV to CTV -- and onto The Trade Desk's platform with its UID2 solution -- look for their support to continue pushing the company's share price to new all-time highs.
