Equity investors have experienced volatility in the technology sector since the start of 2022. Several tech stocks are trading significantly below all-time highs, with the Nasdaq Composite index falling more than 20% in the past year. But it also means you can buy quality, beaten-down tech stocks that have the potential to derive exponential gains in the upcoming decade.
If you have $5,000 to invest right now with a long-term horizon, you can split the cash and buy shares of Datadog (NASDAQ:DDOG) and Magnet Forensics (TSX:MAGT) in March 2023. Here’s why.
One of the fastest-growing tech stocks in the world, Datadog increased sales by 44% year over year to US$469 million in the fourth quarter (Q4) of 2022. It ended the December quarter with 23,300 customers compared to 18,800 at the end of 2021.
Datadog stated around 2,780 customers generate annual recurring revenue (ARR) of at least US$100,000, up from 2,010 customers in the year-ago period. These customers accounted for 85% of the total ARR. Further, 317 customers generated an ARR of more than US$1 million compared to 216 customers in the prior-year quarter.
Datadog reported a free cash flow of US$96 million in Q4, indicating a margin of 21%. Its dollar-based net retention rate stood at more than 130% on the back of increased customer usage and higher product adoption. It suggests existing customers increased spending on the Datadog platform by 30%.
Due to a challenging macro-environment, Datadog observed slower usage growth among existing customers in Q4 compared to the first nine months of 2023 due to lower enterprise spending.
Datadog stock is currently valued at a market cap of US$24 billion. Down 62% from all-time highs, DDOG stock is priced at 11 times forward sales and 68 times forward earnings, which is quite steep.
However, Datadog is forecast to increase earnings by more than 33% annually in the next five years. Comparatively, its sales are forecast to surge from US$1.68 billion in 2022 to US$2.69 billion in 2024.
Given consensus price target estimates, Datadog stock is priced at a discount of almost 40%.
Magnet Forensics stock
A Canadian company operating in the cybersecurity vertical, Magnet Forensics equips enterprises with tools to investigate digital crimes and online attacks. It develops digital investigation software that acquires and manages evidence from several digital sources such as smartphones, Internet of Things devices, and computers.
Magnet Forensics has forecast its total addressable market to grow from US$173 billion in 2020 to US$270 billion in 2026.
Magnet’s portfolio of solutions is currently used by more than 4,000 law enforcement, military, and natural security agencies, in addition to several other public and private sector organizations across 100 countries. Moreover, around 150 of the Fortune 1000 companies are Magnet’s customers.
Magnet Forensics has increased sales from US$38.65 million in 2019 to US$89 million in the last 12 months. Analysts forecast the company’s sales to rise to US$132 million in 2022 and US$172 million in 2023.
So, MAGT stock is priced at 10.5 times forward sales, which is quite elevated. But the company’s stellar revenue growth, widening base of enterprise customers, and improving profit margins make it a top bet for long-term investors.