In January, the S&P 500 (^GSPC 1.02%) has done something it hasn't done in two years: The benchmark index reached a record high and officially entered bull market territory. That creates an opportunity for investors. The S&P 500 returned an average of 169% during the dozen bull markets that have taken place since its inception in 1957, and many stocks are sure to soar during the next one
With that in mind, now is a good time to buy shares of Snowflake (SNOW 3.69%) and Datadog (DDOG 4.95%). The companies placed first and second, respectively, on the Fortune Future 50 List for 2023, an annual ranking of the world's largest companies based on long-term growth prospects. Both stocks are also affordable, at less than $200 per share.
Here's what investors should know about Snowflake and Datadog.
1. Snowflake
The Snowflake data cloud helps businesses improve decision-making and build applications, and it supports a range of workloads that would otherwise require multiple products. Specifically, the platform includes data engineering tools to capture and transform data, it serves as a data lake for storage, and it works as a data warehouse for analytics. It also features a marketplace that supports data sharing.
In addition to consolidating workloads, Snowflake has another key advantage in its status as a cloud-neutral vendor. Specifically, its platform runs across all three major public clouds: Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud. That convenience is clearly resonating with customers. Snowflake earned a sensational Net Promoter Score of 72 in 2022, while competing cloud vendors earned an average score of 21.
Snowflake reported strong results in the third quarter. Its customer count increased 24% to 8,907, and the average customer spent 35% more over the past year. In turn, third-quarter revenue increased 32% to $734 million, and non-GAAP net income more than doubled to reach $90 million. That momentum should carry into future quarters, given that data analytics and artificial intelligence (AI) are the top two IT spend priorities, according to a survey from Morgan Stanley.
Snowflake is already well positioned to enable AI workloads because of its data-sharing capabilities, but the company recently partnered with Nvidia to further its AI ambitions. Specifically, the deal brings Nvidia chips and NeMo software to data cloud customers, allowing them to develop large language models and build generative AI applications on Snowflake.
Wall Street expects Snowflake to grow revenue at 32% annually over the next five years. That consensus estimate justifies its recent valuation of 24.8 times sales, creating a reasonable buying opportunity for patient investors. To be clear, the current valuation is not cheap, and the stock may be volatile in the near term, but shareholders have a good shot at market-beating returns over the next five years.
2. Datadog
Datadog sells observability software that helps development, operations, and security teams work more productively. Its platform includes more than two dozen modules that aggregate machine data from every layer of the corporate IT stack. Its software leans on AI to help businesses prevent performance problems across critical applications and infrastructure.
Independent research companies see Datadog as a leader in several observability software verticals, including application performance monitoring, log monitoring, and AI for IT operations. Datadog also recently announced a performance-monitoring product for large language models and generative AI applications, and a natural language copilot that accelerates incident investigation. Those innovations earned the company a spot on Morgan Stanley's list of 11 software vendors best positioned to benefit from generative AI.
Datadog reported strong results in the third quarter. Revenue increased 25% to $548 million, and non-GAAP net income jumped 96% to $158 million. But Datadog sees its addressable market reaching $62 billion by 2026 as digital transformation projects make IT environments increasingly complex. That includes trends such as cloud migration and AI adoption.
In that context, Datadog is well positioned to grow its business. Its broad portfolio lets customers consolidate vendors, meaning businesses can standardize on the Datadog platform rather than stitch together point products from multiple companies. Datadog has also built up cachet with developers, as evidenced by its strong position in multiple observability markets, and that brand authority should drive demand in the future.
With that in mind, Wall Street expects Datadog to grow sales at 26% annually over the next five years. That consensus estimate makes its recent valuation of 21.9 times sales seem fair, especially when the three-year average is 30.8 times sales. Long-term investors would do well to buy a few shares of this growth stock today without hesitation.
