The tech sector continues to deliver outsized gains, as investors remain bullish on asset-light companies that enjoy pricing power and are part of multiple megatrends. While the tech sector is extremely disruptive, investing in quality stocks can help you generate market-crushing returns over time.
Here are two such tech stocks I’d buy in March 2024.
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Datadog stock
Valued at a market cap of $44 billion, Datadog (NASDAQ: DDOG) operates an observability and security platform for cloud applications. Its SaaS (software-as-a-service) platform integrates and automates functions such as infrastructure monitoring, application performance monitoring, log management, cloud security, and much more, providing a unified stack for enterprises.
In the fourth quarter (Q4) of 2023, Datadog increased revenue by 26% year over year to US$590 million, ending the year with 27,300 customers, up from 23,200 in 2022.
It ended Q4 with 3,190 customers that generated at least US$100,000 in annual recurring revenue (ARR), up from 2,780 customers in the year-ago quarter. Moreover, the number of customers generating an ARR of US$1 million rose from 317 to 396 in this period.
The cloud-based SaaS company reported a free cash flow of US$201 million, indicating a margin of 34%.
At the end of Q4:
- 83% of its customers used two or more products, up from 81%
- 47% of customers used four or more products, up from 42%
- 22% of customers used six or more products, up from 18%
- 9% of customers used eight or more products, up from 6%
Datadog emphasized its cross-production adoption is driven by both new and legacy products. A widening customer base, higher adoption of products, and an expanding product portfolio should allow Datadog to drive sales in the upcoming decade.
Analysts expect Datadog to increase sales from US$2.13 billion in 2023 to US$3.17 billion in 2025. Unlike other growth stocks, Datadog reports consistent earnings and trades at a discount of 12% to consensus price target estimates.
Shopify stock
One of the largest tech companies in Canada, Shopify (TSX: SHOP) trades 52% below all-time highs. Despite the recent pullback, Shopify stock has returned 3,220% to shareholders since its initial public offering in 2015.
Despite an uncertain macro environment for businesses, Shopify increased sales by 30% year over year in Q4 of 2023. Its robust platform is quite crucial for companies looking to set up an online presence. Shopify continues to attract merchants across categories while widening its portfolio of products and solutions.
While the e-commerce giant is yet to report consistent net income, its cash-flow trends are encouraging. In Q4, Shopify reported a free cash flow of US$446 million, up from US$90 million in the year-ago period. Its cash flow margins have risen from 16% to 21% in the last 12 months.
An improving cash flow margin should translate to sustainable earnings in 2024. The company expects a free cash flow margin of less than 20% in Q1 but expects this metric to improve in the following quarters.
According to consensus estimates, Shopify is forecast to end 2028 with an adjusted earnings of US$7.5 per share. If the stock is priced at 30 times forward earnings, Shopify stock should trade at US$225 in February 2028, indicating an upside potential of 200% from current levels.
