The year 2022 promises to be quite difficult for the American stock market. Soaring inflation should cause the Federal Reserve to continue raising benchmark interest rates, which could further stifle economic growth in the near term. Unsurprisingly, both the S&P500 and the Nasdaq Compound are down 17% and 24%, respectively, since the start of the year.
While bear markets can be painful for many investors, they provide a window of opportunity for bargain-hunting investors looking for fundamentally sound companies. Business spending on areas such as networking, security and surveillance will be less affected during a recession, as these are essential business services. Thus, companies such as Cloudy (REPORT -7.47%) and Datadog (DDOG -7.35%) should continue to grow even in difficult market conditions.
Here’s why these companies may prove to be attractive investment opportunities in July 2022.
Shares of Leading Player in Cloud-Based Content Delivery Network (CDN) and Distributed Denial of Service (DDoS) Cybersecurity Cloudy (REPORT -7.47%) are down more than 56% since the start of the year. Investors are worried about stocks with negative free cash flow in tough economic times. The company is also not yet profitable, primarily due to large stock-based compensation expenses among other general and administrative expenses. Despite these challenges, the magnitude of the equity price correction appears unwarranted.
Cloudflare’s cloud-native, edge-based network (data computing is performed in localized data centers closer to end users rather than a centralized location) spans 270 cities in over 100 countries around the world . The company provides its customers with a highly efficient, scalable, affordable and secure software networking solution that helps improve the performance, reliability and security of their critical applications and software infrastructure. The company also offers tools for developers to build and run custom programmable apps on the Cloudflare platform.
Cloudflare has managed to successfully implement a “freemium” pricing model. Here, basic networking and security services are offered free to customers, and customers have to upgrade to paid plans to access advanced features. The strategy appears to be working well, given that the company’s number of paying customers has grown annually at a compound average growth rate (CAGR) of 28%, from 73,555 in the first quarter of 2019 to 154,109 in the first. quarter of 2022 (end March 31, 2022). The company’s large customers (paying annualized revenues greater than $100,000) grew at a much faster rate each year with a CAGR of 66%, growing from 336 to 1,537 in the same frame.
Cloudflare reported a net dollar retention rate (DBNRR) of 127% in Q1. This means paying customers in Q1 2021 spent 27% more on Cloudflare solutions in Q1 2022, including the impact of customer churn. With customers switching to more Cloudflare products, it has become more difficult for them to switch to the competition. The company’s gross retention rate of over 90% highlights the loyalty of its customer base.
Cloudflare is currently targeting a total addressable market of $115 billion, which is expected to grow to $135 billion by 2024. Against this backdrop, with the company’s revenue of just $656 million in 2021, there remains significant potential future growth in the years to come. quarters.
2. Data dog
Shares of Datadog, a leader in application performance monitoring and observability, have fallen 40% so far this year. This drop can be attributed mostly to broader market declines. However, the fundamental history of the company is intact.
Datadog has managed to grow its revenue year-over-year by more than 65% since 2017. The company is targeting an estimated market of $42 billion in 2022 and is expected to reach $53 billion by 2025.
Datadog’s customer count grew 30.3% year-over-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 reported an impressive increase in large enterprise customers (paying annual recurring revenue of over $100,000 and $1 million). Additionally, existing customers have consistently spent more on Datadog’s solutions in subsequent years, as evidenced by its DBNRR of over 130% for the past 19 consecutive quarters. The company’s gross dollar revenue retention rate of over 95% also highlights its low churn rate. A loyal customer base including several large customers coupled with an effective upselling strategy can help Datadog withstand the pressures of the recession.
Datadog is not yet a profitable business. However, the company already has a positive cash flow. The company is currently trading at 13.2 times forward sales, the lowest since January 2021. Considering all of these positives, this growth stock seems like a smart long-term investment.
Manali Bhade has no position in the stocks mentioned. The Motley Fool holds positions and recommends Cloudflare, Inc. and Datadog. The Motley Fool has a disclosure policy.