The Nasdaq Composite (^IXIC 2.02%) tumbled 33% in 2022 as recession fears rattled Wall Street, notching its worst annual performance since the Great Recession. The index has suffered a double-digit decline in a calendar year only nine times since its inception in 1971.
Historically, those drawdowns have come with a silver lining. The Nasdaq usually rebounds strongly during the 24 months following an annual decline. Specifically, following a one-year decline of at least 10%, the Nasdaq has returned a median of 52% over the next two years.
To add context, the index has advanced about 39% since the beginning of 2023. If the rise sticks to the median, the upside would be about 13% through the rest of 2024. Of course, past performance is never a guarantee of future returns. When the Nasdaq nosedived in 2022, the trigger was a global pandemic for which there was no historical precedent. So the index may not perform as expected this year.
Nevertheless, the Nasdaq returned an average of almost 15% annually over the last decade, so patient investors can still buy stocks with confidence. Datadog (DDOG 4.95%) and Intuit (INTU 1.62%) are compelling Nasdaq stocks to buy now given their competitive strengths, growth opportunities, and reasonable valuations.
1. Datadog
Datadog specializes in IT observability and cybersecurity. Its platform comprises more than two dozen modules that source and analyze machine data from across the corporate technology stack, helping businesses identify and resolve performance issues and security threats throughout their applications and infrastructure. That data also informs its artificial intelligence (AI) engine, which automates investigative workflows to accelerate incident remediation.
Datadog is a recognized leader in several observability software verticals, including application performance monitoring and AI for IT operations. The company also has a strong presence in data center server monitoring, log monitoring, and cloud infrastructure monitoring. The driving forces behind that success are continuous innovation and a deep portfolio. Datadog regularly releases new modules and features, and its broad software suite allows businesses to replace disjointed point products with an integrated platform from a single vendor. That can improve operating efficiency.
Circling back to innovation, Datadog quickly pivoted to monetize demand for generative AI by launching a new software module. LLM Observability brings performance monitoring to the large language models that power generative AI applications. Notably, Alex Zukin of Wolfe Research believes Datadog could become "the fastest growing software company" as the generative AI boom unfolds.
Datadog posted stellar financial results in the third quarter. Revenue increased 25% year over year to $548 million and non-GAAP net income soared 96% to $158 million. Investors can expect a similar growth trajectory in the years ahead. Datadog has only tapped a fraction of its $45 billion addressable market, but IT trends like cloud migration and digital transformation will make performance monitoring and security software increasingly important over time.
On that note, Morningstar analysts expect Datadog to grow revenue by 31% annually over the next five years. In that context, its current valuation of 18.3 times sales looks fair, especially when the three-year average is 31.2 times sales. Investors should feel comfortable buying a small position in this technology stock today.
2. Intuit
Intuit provides financial software and services to small businesses, self-employed persons, and individual consumers. The company holds a 73% market share in tax preparation software with TurboTax, and it holds an 80% market share in accounting software with QuickBooks. Inuit also owns Credit Karma, a financial management platform that leans on its vast data to connect consumers with credit cards, loans, and insurance products.
Intuit hopes to deepen its relationship with small businesses by providing adjacent services for payment processing, payroll, and marketing. The company also offers access to bookkeeping professionals through QuickBooks Live, as well as tax professionals through TurboTax Live. Those products let users (1) seek expert advice or (2) outsource accounting and tax preparation.
Intuit posted reasonably good financial results in the first quarter of fiscal 2024 (ended Oct. 31, 2023). Revenue increased 15% year over year to $3 billion and non-GAAP net income jumped 45% to $960 million. Management expects momentum to moderate in future quarters. Full-year guidance calls for revenue to rise 11.5% with non-GAAP EPS growth of 13%. Investors should anticipate a similar trajectory in the years ahead as Intuit leans into its "AI-driven expert platform" strategy.
Intuit recently launched a generative AI assistant (Intuit Assist) that provides predictive insights and automates workflows across TurboTax, QuickBooks, and Credit Karma. For instance, Intuit Assist can reduce tax preparation time by creating checklists, finding deductions, and steering users toward tax professionals when necessary. In that way, the generative AI assistant will not only improve the user experience but also drive the adoption of TurboTax Live. The same applies to QuickBooks Live.
Looking forward, Intuit believes it has captured just 5% of its $300 billion addressable market, and management is targeting double-digit revenue growth over the next three to five years. That forecast reflects annual revenue growth of 10% in TurboTax software and services, 17.5% in QuickBooks software and services, and 22.5% in Credit Karma.
In that context, its current valuation of 11.3 times sales seems reasonable, and it falls slightly below the three-year average of 11.5 times sales. From that price, Intuit has a good shot at outperforming the Nasdaq over the next five years, just as it did over the last five.
