Investing in growth stocks that are positioned to grow their revenue, earnings, and cash flow over time is a time-tested strategy to grow long-term wealth and derive outsized gains. In this article, I have identified two such growth stocks that should help you beat the broader indices in the upcoming decade.
Datadog stock
Valued at US$42.7 billion by market cap, Datadog (NASDAQ: DDOG) operates as an observability and security platform for cloud applications. Its products include infrastructure and application performance monitoring, log management, network monitoring, workflow automation, and application security management, among others.
Despite a sluggish macro environment and lower enterprise spending, Datadog reported sales of US$611 million in the first quarter (Q1) of 2024, up 27% year over year. It ended Q1 with 28,000 customers, up from 25,500 in the year-ago period.
The number of customers who spend at least US$100,000 annually on the Datadog platform rose from 2,910 to 3,340 in the last 12 months, accounting for 87% of annual recurring revenue (ARR).
Unlike several other growth stocks that are still unprofitable, Datadog reported a free cash flow of US$187 million, indicating a 31% margin.
The key drivers of Datadog’s revenue are the expansion of its customer base and higher customer spending. In Q1, 23% of its customers used at least six products, up from 19% last year. The number of customers using at least eight products rose from 7% to 10%.
Datadog expects top-line growth to remain strong going forward as it continues to see interest in artificial intelligence-powered products from customers. Its ARR from these next-gen customers accounts for less than 4% of the total ARR.
During its earnings call, Datadog’s chief executive officer, Olivier Pomel, stated, “To have customers understand AI technologies and bring them into production applications, our AI integrations allow customers to pull their AI data into the Datadog platform. And today, about 2,000 of our customers are using one or more of these AI integrations.”
Restaurant Brands International stock
The second growth stock on my list is Restaurant Brands International (TSX: QSR), the parent company of fast-food chains such as Burger King, Tim Hortons, and Popeyes. After adjusting for dividends, QSR stock has returned over 200% to shareholders since its initial public offering in late 2014. Despite its outsized gains, QSR currently offers you a tasty dividend yield of 3.2%, given its annual payout of US$2.32 per share.
Earlier this month, Restaurant Brands International announced two transactions in China, including the acquisition of Popeyes China and the co-investment with Cartesian Capital in the business of Tims China or TH International.
These two transactions worth $45 million reflect RBI’s confidence in China, one of the largest quick-service restaurant markets globally.
RBI agreed to acquire Popeyes China from Tims China for US$15 million. Following the transaction, RBI will own and operate Popeyes China, which has 14 outlets in the country. Moreover, to fuel the growth of Tims China, Cartesian Capital and RBI agreed to invest up to US$50 million in the business via three-year convertible notes.
QSR stock trades 11% below all-time highs and is priced at 21.4 times forward earnings, which is quite cheap given earnings are forecast to expand by 10% annually in the next five years.
