Investors should consider adding growth stocks to their portfolio to complement the blue chip stocks that dominate major market indexes. Tech companies with excellent growth prospects and strong products can deliver returns that outpace the market over the long term, but it's important to buy shares before they launch to expensive valuations. If you're making contributions to a Roth IRA for last year, these two stocks could be a great way to deploy $1,000 for long-term growth.
Dynatrace
Dynatrace (DT +0.38%) provides cloud-based observability, application monitoring, and analytics solutions that are valuable resources to other technology companies. That's a lot of jargon for the unacquainted, but these are important functions to ensure the effective, efficient, and secure deployment of enterprise software. That's made Dynatrace an important piece of the digital transformation trend in recent years, and the artificial intelligence (AI) revolution is keeping that momentum alive.
NYSE: DT
Key Data Points
Dynatrace's products are regarded as among the best in class by rating organizations and customers.
Some analysts assign a narrow economic moat to the business, suggesting that its competitive position could be jeopardized by capable peers. That's something to consider for the long term, but its reputation is pristine for the moment, and that's unlikely to change in the short term.
The quality is evident in recent financial results. Dynatrace impressed Wall Street over the past few quarters with strong earnings reports that topped analyst expectations and the company's own internal forecasts. Its most recent quarter delivered 21% growth in both revenue and annual recurring revenue (ARR), which measures contractually obligated subscription revenue. Dynatrace is on pace to deliver $150 million of net profits and nearly $350 million in free cash flow for the full year. This builds on multiple straight years of consistent revenue growth that's translating to higher cash flows, and there's no sign of weaker demand around the corner.
DT Revenue (TTM) data by YCharts.
Dynatrace stock hasn't exactly slumped, but it doesn't seem to be attracting the attention of other AI and growth stocks. It's lagged the Nasdaq and competitors such as Datadog and Splunk over the past year.
Its forward P/E ratio is 42. That's not particularly cheap, but it's a significant discount compared to its higher-growth peer Datadog. The stock also dipped following its last earnings report, despite exceeding expectations, because it offered cautious guidance on new ARR bookings, citing slower-than-expected deal closings. Dynatrace is still forecasting impressive revenue growth and margin expansion. There aren't many cash-flow-positive companies with this growth profile, reasonable valuation, and respected AI product portfolio.
UiPath
UiPath (PATH +2.81%) is a leader in artificial intelligence and automation that is allowing a wide range of customers to reduce costs and improve turnaround speed on repetitive tasks. Much like Dynatrace, UiPath receives excellent product reviews from customers and third parties, speaking to the quality of its development efforts. Importantly, the company uses AI to identify process automation opportunities, so the recent exponential improvements in AI tech could accelerate the quality and value proposition of its offering.
The strong demand for UiPath's products is obvious when you inspect its financial results. The company reported 24% revenue growth in its most recent quarter, extending a steady march higher in sales. It's done a good job turning that growth into profitability, too. Despite reporting narrow net losses, it's become free-cash-flow-positive. The difference in cash flow relative to accounting profits is due largely to the impact of noncash share-based employee compensation expenses.
PATH Revenue (TTM) data by YCharts.
UiPath shares are up more than 70% over the past year, driving its forward P/E ratio above 47, so many investors could justifiably conclude that the stock has already taken off. However, it's still roughly 60% below its all-time high, and that P/E ratio looks less expensive when compared to its growth rate -- the stock's PEG ratio is close to 2, which isn't particularly high. UiPath's addressable market could explode over the next decade, so the stock has major potential for returns moving forward.
