Fortune recently published its Future 50 List for 2023, an annual ranking of the world's largest companies based on long-term growth prospects. Software vendors shaping the future of artificial intelligence (AI) were a common motif. Datadog (DDOG 4.95%) and CrowdStrike (CRWD 2.03%) made the list on that merit, ranking No. 2 and No. 3, respectively.
That recognition should carry weight for investors. Past Fortune Future 50 cohorts have grown revenue more quickly than the S&P 500 and the S&P 500 Growth indexes, and the first three cohorts (2017 to 2019) are beating both indexes in shareholder returns. Here's why Datadog and CrowdStrike are worth buying today.
1. Datadog
Datadog specializes in observability software. Its platform integrates over two dozen modules that monitor various aspects of the corporate technology stack, enabling businesses to identify and resolve performance issues. Datadog's platform strategy positions the company as a product consolidator, meaning it can replace multiple-point solutions with a cohesive software suite. And that selling point is resonating with the market.
Research company Gartner has recognized Datadog as a leader in application performance monitoring, and Forrester Research has recognized its leadership in artificial intelligence (AI) for IT operations. The company is also a top contender in data center server monitoring, log monitoring, and cloud infrastructure monitoring, among other end markets.
In keeping with its track record for rapid innovation, Datadog has quickly pivoted to meet the growing demand for AI with two new products. The first is LLM Observability, software that extends performance monitoring to the large language models (LLMs) that power generative AI applications. The second is Bits AI, a natural language interface that can automate parts of the incident investigation and response process.
Datadog reported solid financial results in the third quarter. Revenue increased 25% year over year to $548 million, marking a stabilization after five consecutive quarters of slowing growth, and non-GAAP (generally accepted accounting principles) net income soared 96% to $158 million. But Datadog has only scratched the surface of its $45 billion addressable market, giving the company a good shot at accelerating growth as the economic environment improves.
Indeed, Malik Ahmed Khan of Morningstar thinks Datadog could grow revenue at 31% annually over the next five years, and Alex Zukin of Wolfe Research believes the rise of generative AI could make Datadog "the fastest growing software company." In that context, its current valuation of 20 times sales looks reasonable. Patient investors willing to hold this growth stock for at least five years should feel comfortable buying a small position today.
2. CrowdStrike Holdings
CrowdStrike specializes in cybersecurity software. Like Datadog, the company has a platform strategy that integrates products aimed at several end markets, and it has a strong position in many of them. Consultancy Frost & Sullivan recently ranked CrowdStrike a leader in cloud security, and Forrester Research recognized its dominance in endpoint security and threat intelligence services.
CrowdStrike has undoubtedly benefited from its ability to support product consolidation, but its success also comes from sophisticated machine learning capabilities built on a foundation of vast threat intelligence. Frost & Sullivan says, "CrowdStrike leads the industry with regards to the application of artificial intelligence/machine learning to endpoint security," and the upshot of that advantage is superior threat prevention for clients.
CrowdStrike reported strong financial results in the third quarter. Revenue increased 35% to $786 million, driving annual recurring revenue above $3 billion. No pure-play cybersecurity software vendor has ever reached that mark before CrowdStrike. Additionally, non-GAAP net income more than doubled to reach a record $199 million. Investors can expect similar momentum in the future as businesses modernize security systems, consolidate vendors, and seek productivity through automation.
On that last point, CrowdStrike recently introduced Charlotte AI, a generative AI assistant that automates security workflows related to risk assessment, investigation, and response. Charlotte AI is still in beta but could have a material impact down the road.
Morgan Stanley recently selected CrowdStrike as one of 11 software companies best positioned to benefit from generative AI. Datadog also made that list.
With that in mind, Malik Ahmed Khan of Morningstar expects CrowdStrike to grow revenue at 31% annually over the next five years. That forecast makes its current valuation of 21.9 times sales look tolerable, though nowhere near cheap. Patient investors who plan to hold the stock for at least five years should start with a small position today.
