The Nasdaq Composite recently set a new record high for the first time in more than two years. As a result, the growth-focused index is officially back in bull market territory, and that has historically boded well for stocks. Indeed, the Nasdaq returned an average of 215% during the eight bull markets that have taken place since 1990.
Investors hoping to capitalize on that upward momentum should be putting money into the stock market today. Here's why two Nasdaq stocks, Datadog (DDOG -1.89%) and CrowdStrike (CRWD -0.28%), are worthwhile long-term investments.
1. Datadog
Datadog sells observability and security software. Its platform integrates 19 products, including infrastructure and application monitoring, user and developer experience monitoring, and log management solutions. Those tools help businesses prevent performance problems and protect their IT environments. The Datadog platform also features artificial intelligence (AI) capabilities that accelerate incident remediation.
Datadog has an advantage in its ability to consolidate a broad range of observability workloads. Businesses can replace disparate products from different vendors with an integrated platform from Datadog. Consolidating workloads on a single platform tends to be more cost-efficient simply because there are fewer systems to maintain.
That platform strategy also means Datadog has a plethora of products with which it can land new customers and expand those relationships over time. The company has been successful in that respect, as evidenced by its strong presence in several observability markets. For instance, analysts have recognized the company as a top contender in application performance monitoring, cloud infrastructure monitoring, database monitoring, and AI for IT operations.
Datadog delivered strong results in the fourth quarter, beating top-line guidance. The company increased its customer base by 18% year over year and reported a net revenue retention rate above 110%, meaning the average spend per existing customer rose more than 10% over the past year. In turn, sales climbed 26% year over year to $590 million and non-GAAP net income more than doubled to reach $0.44 per diluted share.
Among the more impressive figures was the 74% increase in remaining performance obligation (RPO), a leading indicator of future revenue. Specifically, RPO includes contracted revenue that has not yet been recognized. The rapid expansion in RPO during the fourth quarter could lead to accelerating revenue growth in future quarters.
Going forward, Datadog should benefit from trends like cloud migration, AI, and the proliferation of software systems and connected devices. In short, anything that makes IT environments more complicated should drive demand for observability software. Datadog is well-positioned to capitalize on that demand. To quote Alex Zukin at Wolfe Research, "Even in a cost-cutting obsessed macro environment, engineers simply cannot live without their Datadog."
Wall Street expects the company to grow sales at 25% annually over the next five years. In that context, the current valuation of 20.6 times sales is tolerable. To be clear, Datadog shares are not cheap and investors should expect volatility, but the company could also deliver above-average shareholder returns in the coming years. Now is a good time for patient, risk-tolerant investors to buy small positions in this technology stock.
1. CrowdStrike Holdings
CrowdStrike provides cybersecurity software and services. Its platform includes over two dozen applications that cover several large markets, and the company is a major player in many of them. Most notably, CrowdStrike is the leader in modern endpoint security, which Morgan Stanley sees as the largest and fastest-growing cybersecurity market. But analysts have also recognized CrowdStrike as a leader in cloud security, threat intelligence, and managed detection and response, among other markets.
One reason for that success is the breadth and simplicity of its Falcon platform. To quote CEO George Kurtz, "CrowdStrike is the only single-platform, single-agent technology in cybersecurity that solves use cases well beyond endpoint protection." When Kurtz talks about "single-agent technology," he is referring to the single, lightweight sensor through which every application is delivered. Unlike products from other vendors, that sensor can be installed without a reboot and it places very little burden on the device (it consumes less than 1% of compute resources).
Beyond that, CrowdStrike has earned a reputation for best-in-class threat protection due to what some analysts see as superior artificial intelligence (AI) capabilities. The rationale is that, as a leader in endpoint security and threat intelligence, CrowdStrike has a tremendous amount of security data on which to train its machine learning models.
CrowdStrike continued to benefit from growing demand for cybersecurity in the fourth quarter. The company reported a net revenue retention rate of 119%, meaning existing customers spent 19% more over the past year. It also reported a gross retention rate of 98%, meaning it kept the vast majority of its customers. In turn, sales increased 33% to $845 million and non-GAAP net income increased 102% to $0.95 per diluted share.
Innovation has kept CrowdStrike on the leading edge of cybersecurity. It was among the first vendors to deliver AI-powered protection from the cloud, and it's still bringing new products to market today. CrowdStrike recently launched Falcon for IT, software that unifies and automates IT and security workflows, and Kurtz says customer excitement is "off the charts."
Additionally, CrowdStrike recently partnered with Nvidia to provide customers with access to accelerated infrastructure and software, letting businesses build custom AI security applications trained on their own data. That value proposition creates new monetization opportunities for CrowdStrike, and it could certainly attract new customers.
Wall Street expects CrowdStrike to grow revenue at 29% annually over the next five years, which makes its current valuation of 26.4 times sales look tolerable. That said, like Datadog, this stock is not cheap, and volatility is to be expected. But CrowdStrike and Datadog are high-quality companies with good shots at creating significant shareholder value. Patient investors should feel comfortable buying small positions in this growth stock today.
