The year 2022 will be quite challenging for the US stock market. Rising inflation is expected to prompt the Federal Reserve to raise interest rates further, which may further dampen economic growth in the short term. Not surprisingly, both the S&P500 and the Nasdaq Composite are down 17% and 24% year-to-date, respectively.
While bear markets can be painful for many investors, they present an opportunity for bargain-hunting investors looking for fundamentally strong companies. Business spending in areas like networking, security and surveillance will be less affected during a recession considering they are mission-critical services. Therefore companies such as cloud flare (NETWORK -7.47%) and data dog (DDOG -7.35%) should continue to grow even under difficult market conditions.
Therefore, these companies may prove to be attractive investment opportunities in July 2022.
1. Cloud Flare
Shares in the leading cloud-based content delivery network (CDN) and distributed denial-of-service (DDoS) cybersecurity provider cloud flare (NETWORK -7.47%) are down over 56% so far this year. Investors are nervous about free cash flow negative stocks during tough economic times. The company must also still be profitable, primarily due to significant stock-based compensation expenses among other general and administrative expenses. Despite these challenges, the magnitude of the course correction appears unjustified.
Cloudflare’s cloud-native edge-based network (data computation occurs in localized data centers closer to end users, rather than in one central location) spans 270 cities in more than 100 countries around the world. The company offers its customers a highly efficient, scalable, cost-effective and secure software-based networking solution that helps improve the performance, reliability and security of their business-critical applications and software infrastructure. The company also provides developers with tools to build and run custom programmable applications on the Cloudflare platform.
Cloudflare has managed to successfully implement a “freemium” pricing model. Here, customers are offered basic network and security services for free, and customers have to opt for paid plans to access advanced features. The strategy appears to be working well considering that the company’s paying customers have grown annually at a compounded average growth rate (CAGR) of 28%, from 73,555 in Q1 2019 to 154,109 in Q1 2022 (ended 31). March 2022). The company’s major accounts (which pay annual revenues in excess of $100,000) have been growing much faster annually, at a CAGR of 66% from 336 to 1,537 over the same range.
Cloudflare reported a dollar-based net retention rate (DBNRR) of 127% in the first quarter. That means paying customers spent 27% more on Cloudflare’s solutions in Q1 2022 from Q1 2021, including the impact of customer churn. As more customers choose Cloudflare products, it becomes harder for them to switch to the competition. The company’s gross retention rate of over 90% underscores the consistency of its customer base.
Cloudflare is currently targeting a total addressable market of $115 billion, which is expected to be worth $135 billion by 2024. With that in mind, with the company’s 2021 revenue of just $656 million, there remains significant potential for future growth in the future quarters.
2. Data Dog
Shares in the leading provider of application performance monitoring and observability, Datadog, are down 40% so far this year. This decline is mainly due to broader market declines. However, the basic history of the company is intact.
Datadog has managed to increase its revenue by over 65% year over year since 2017. The company is targeting a market valued at $42 billion in 2022 and expected to grow to $53 billion by 2025.
Datadog’s customer base grew by 30.3% year-on-year to 19,800 at the end of the first quarter (ended March 31, 2022). Currently, 81% of customers use more than two products and 35% use more than four products. The company has reported an impressive increase in the number of large enterprise customers (paying over $100,000 and $1 million annually in recurring revenue). Additionally, existing customers have continued to spend more on Datadog’s solutions over the years, as evidenced by DBNRR of over 130% for the last 19 consecutive quarters. The company’s dollar-based gross revenue retention rate of over 95% also highlights low customer churn. A persistent customer base that includes several large accounts, coupled with an effective upselling strategy, may allow Datadog to withstand recessionary pressures.
Datadog is not yet a profitable company. However, the company is already cash flow positive. The company currently trades at 13.2 times forward sales, its lowest level since January 2021. Given all of these positives, this growth stock seems like a smart long-term investment.
Manali Bhade has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare, Inc. and Datadog. The Motley Fool has a disclosure policy.