KEY POINTS
- Over the past year, growth stocks have dropped a lot, making many looks suitable.
- Google’s stock price has been at one of its best in the last ten years.
- Datadog is starting to scratch the surface of how much it can grow.
I can’t get enough of these companies that are growing.
I like to start with a small amount of money in a stock and add more as my confidence grows. Alphabet (GOOG 0.97%) (GOOGL 1.09%) and Datadog (DDOG 1.82%) are two stocks I’ve been buying like crazy to increase my allocation over the past few months. They have excellent growth prospects, which could put them in a position to beat the market in the coming years.
Buying more of Google’s parent company
Alphabet, the company that owns Google, was finally added to my portfolio in early 2020 after I had put it off for years. A pandemic caused the market crash. I wanted to keep buying more shares, but they went back up very quickly. But I had a second chance to add when they started to sell off last year. Since then, I’ve increased my stake a few times and will keep buying shares as long as they stay at or below their current price.
Alphabet is trading near its lowest valuation levels in the last ten years, which is something I like about it.
Alphabet’s price-to-earnings (PE) ratio is at its lowest level in 10 years, and its price-to-free cash flow level is around where it was in 2017. That’s a crazy amount for a company growing as fast as Alphabet.
Its total sales went up by 6% to $69.1 billion in the third quarter, and they went up by 11% if you don’t account for currency changes. Even though it spent more, it made less money. Most of this was because it spent more on research and development and sales and marketing to help it grow in the future.
In the meantime, the company had a solid free cash flow of $16.1 billion in the quarter and $63 billion over the last 12 months. So, at the end of the period, it had $116 billion in cash and securities that could be sold.
The company has a lot of cash on hand and a lot of free cash flow, which gives it the money it needs to keep growing shareholder value. It can use the money to buy back its cheap shares, invest in capital, and buy other companies. It just finished buying Mandiant for $5.4 billion to improve its cybersecurity services.
The company has been buying other businesses for a long time, which has helped it grow. In the past year, the tech industry has been slowing down, which has caused company valuations to go down. Alphabet has the money to go on the offensive and take advantage of this opportunity.
Fetching an enormous opportunity
Since I started my position in Datadog in early 2021, I’ve been steadily growing it. Even though its growth rate is speedy, its share price keeps going down, which is a significant factor.
Since 2017, Datadog‘s annual revenue has grown by 74%. In the third quarter, sales increased 61% from last year to $436.5 million. Generally accepted accounting principles (GAAP) show that the company is losing money but is starting to make a lot of free cash flow. The company had $67.1 million in free cash in the third quarter, bringing its total cash to $1.8 billion.
The company gives customers an all-in-one platform for cloud observability, monitoring, and security that makes things less complicated. Datadog thinks there is a massive market for its core observability skills. It believes that the total market for this solution will grow from $41 billion in 2016 to $62 billion in 2026.
Datadog can keep multiplying as it gains new customers and deepens relationships with those it already has. More and more customers are subscribing to more products, which helps drive strong customer retention rates and organic growth. The dollar-based net retention rate for the company has been above 130%, which means it keeps customers and strengthens those relationships. Even though 80% of its customers already use at least two products, only 40% use four or more, up from 20% two years ago, and only 16% use six or more, which is also up from 0% two years ago. Because of this, it has a huge opportunity to sell more to its current customers.
Trying to get more growth while it’s cheap.
Over the past year, growth stocks have lost value. That lets me slowly buy more shares of some of my favorite companies, such as Alphabet and Datadog. Even though their stock prices might keep going down in the short term, which would let me buy even more shares, their strong growth in sales and profits should drive their stock prices much higher over the long term.
