Some of the technology sector's fastest-growing companies have suffered a substantial slowdown since 2022, as a rapid rise in interest rates put the brakes on the economy.
But a rebound is underway, especially for Datadog (NASDAQ: DDOG) and Snap(NYSE: SNAP), which have produced strong financial results recently and look poised for a longer-term recovery.
Here's why investors sitting on idle cash -- money they don't need for immediate expenses -- should consider allocating $150 to buy one share of each company, with the intention of holding for the next 10 years (and beyond).
Image source: Getty Images.
1. Datadog: An essential cloud platform, now featuring AI
Datadog is a leading provider of cloud monitoring tools that help over 26,800 businesses make sense of their increasingly complex digital infrastructure. Operating online is critical in the modern economy because consumers value convenience, but doing so comes with a number of challenges, including a lack of visibility over all of the business's critical applications and growing competition.
See, if a business is having technical issues with its website or digital applications, a potential customer is a mere click away from spending their money with a competitor instead. But it's often impossible to tell whether customers are experiencing a glitch, especially if it's isolated to one region of the world. The only indicator might be a drop in sales, by which time it's too late.
Datadog integrates with a company's cloud infrastructure to monitor its status around the clock. Not only will it immediately alert technical teams to outages, but it can even warn of impending traffic spikes so they can scale their infrastructure to prevent a crash. That's especially useful for media organizations, which sometimes experience a surge in visitors in the wake of a major news event.
Now, Datadog customers can draw valuable information faster than ever thanks to the recent launch of an artificial intelligence (AI) chatbot called Bits AI. It can be prompted using natural language to speed up incident response, and it can even suggest appropriate fixes for technical issues. It also integrates with workplace collaboration platforms like Slack to autonomously push incident summaries to the entire team in real time.
Datadog stock has surged 44% since the start of November after it reported better-than-expected financial results for the recent third quarter of 2023 (ended Sept. 30). The company delivered $548 million in revenue, which was a 25% increase year over year, and also exceeded its prior forecast of $525 million. It prompted management to raise its 2023 full-year revenue guidance by $47 million to over $2.1 billion, which investors loved to see.
Datadog stock still trades 40% below its all-time high because of a slowdown in consumption on its platforms throughout 2022 and into early 2023 as customers sought to optimize their cloud spending. But management says that trend is moderating, which was evident in its recent financial results.
With Datadog's revenue and customer base at record highs, the discount in its stock spells opportunity. Cloud computing isn't going away -- in fact, the economy continues to shift further into the digital sphere -- so monitoring tools will remain critical long into the future. The introduction of AI-based tools will only cement Datadog's importance going forward.
2. Snap: Record users and falling interest rates might equal a long-term recovery
Snap is the parent company of popular social media platform Snapchat. Its stock is down 81% from its all-time high, but it has jumped 87% from its recent low point set at the end of September. This might be the beginning of a long-term recovery, because some of the headwinds hurting Snap over the last two years could soon become tailwinds.
Snapchat generates almost all of its revenue by selling advertising to businesses. With elevated inflation and rising interest rates hurting consumer spending, those businesses have cut their ad budgets for fear of a lower return on their investment. As a result, Snap's revenue declined in the first half of 2023 on a year-over-year basis.
But the tide might be turning. Inflation has come down considerably from its peak in mid-2022, and most experts agree the U.S. Federal Reserve has likely finished raising interest rates. In fact, the CME Group's FedWatch tool indicates there could be five rate cuts in 2024, which will likely make advertisers more optimistic about consumer spending.
But here's the best part. Snapchat's daily active user base continued to grow consistently throughout this turbulent period, reaching an all-time high of 406 million in the recent third quarter of 2023 (ended Sept. 30). That's important because when advertisers increase their spending, Snap will have the largest user base to monetize in its history. Therefore, the resurgence in its revenue growth could be big in the coming years.
The early signs are positive: Snap's revenue did rebound in Q3 with an increase of 5%.
Snap also continues to innovate. It has invested heavily in augmented reality (AR) experiences, of which 250 million users interact with each day. But it's also helping advertisers use AR ads; a business can now take a photo of a product and Snap's technology will render an AR-based version users can try on virtually with their smartphone camera. Watchmaker Fossil recently generated 80% more clicks than its benchmark thanks in part to Snap's AR ads.
It's only a matter of time before the broader economy becomes a tailwind for Snap's business once again. Considering users still flock to the Snapchat platform and advertisers are seeing great results from its AR innovations, the company's future looks bright. Snap stock might be on the cusp of a multiyear recovery.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Datadog. The Motley Fool recommends CME Group. The Motley Fool has a disclosure policy.
