Finding young and growing tech stocks is crucial to any investor’s portfolio. The explosive returns these investments can have on a portfolio can accelerate your financial goals faster than almost any other investment — if purchased for the right price. Unfortunately, many investors found themselves on the wrong side of this coin during 2021, as many growth names were unrealistically valued. In 2022, owners of these stocks paid the price, and many now sit deeply in the red.
However, 2023 is a new year, and given how low these five stocks have fallen by various valuation measures, now could be an excellent time to establish long-term positions in them.
The Trade Desk
In the digital advertising age, software like The Trade Desk (TTD 2.96%) offers are vital. It helps advertisers place their ads in front of targeted audiences to get the most out of their marketing dollars. As a testament to the appeal of The Trade Desk’s product, the company grew revenue by 31% in Q3 while many advertisement companies saw little to no growth. Furthermore, it retained 95% of its clients for the eighth consecutive year, showcasing its service’s stickiness.
Digital advertising as an investment is just in the early innings, as we have yet to see the full effect of what a truly personalized advertising experience looks like in many areas, including connected TV or podcasts. With The Trade Desk valued at around 16 times sales, it has returned to its pre-COVID valuation levels. The lofty valuations it boasted in 2021 are gone.
The Trade Desk’s opportunity is massive, and investors should consider scooping up some shares.
Datadog
With the wide variety of software available to businesses, it’s hard to coordinate how each one flows into the other. Datadog‘s (DDOG 5.37%) monitoring and security platform solves this issue, as it allows IT teams to visualize data flows and understand if there is an issue with any business-wide resources. With Q3 revenue growing by 61%, it’s safe to say that its market opportunity is just getting started.
It’s also rapidly acquiring new customers, adding nearly 5,000 customers over the past year. Once Datadog reaches a new customer ceiling, its primary growth engine will be upselling solutions — a strategy that has worked well so far. Two years ago, none of its customers were using six or more of its products. Now, about 16% of its 22,200-strong customer base is.
With the stock trading at 14 times sales, its valuation is similar to that of The Trade Desk, but for a company with higher revenue growth. So if you’re willing to hold a stock for a decade, Datadog will likely impress investors.
Cloudflare
Cloud computing has multiple use cases, including hosting a website. Cloudflare (NET 6.79%) is a leader in this field and gives its clients a cost-effective solution that provides top-notch speed and security. With over 156,000 paying customers, Cloudflare’s hosting service is widespread.
One impressive metric for Cloudflare is how rapidly and consistently it has grown its revenue during its time in the public markets.
NET Revenue (Quarterly YoY Growth) data by YCharts.
Growing revenue by around 50% annually for three straight years is a rare feat, yet Cloudflare has done it. With this execution came an absurdly high price-to-sales valuation of more than 100 in late 2021. But the share price came tumbling down in 2022, and now, its valuation sits at 16 times sales. That valuation won’t be expensive if Cloudflare can keep up its 50% revenue growth in 2023.
In Q3, the number of Cloudflare customers spending more than $100,000 annually with it grew by 51% year over year to 1,908, an indication that the company is just starting to reach its potential.
Twilio
Few software-as-a-service businesses have had a more challenging time recently than Twilio (TWLO 4.15%). Twilio provides APIs (application program interfaces) that allow non-programmers to create code to send text messages to clients easily, draft customized marketing emails, or make automated phone calls.
Twilio’s management had forecast 30% organic revenue growth through 2024, but had to revoke that projection in Q3 2022 due to the shifting economic environment. Investors didn’t like that move, and the stock dropped more than 40% in a matter of days. Currently it sits off nearly 90% from its all-time high. However, Twilio’s stock is valued at a dirt-cheap 2.7 times sales, which is a bargain for a company that is still guiding for 29% revenue growth this year. (Yes, that’s just 1 percentage point less than the previously forecast growth rate.)
Twilio is also slated to reach non-GAAP operating profitability in 2023, providing investors with some sense of profitability. With a focus on digital communication, an essential aspect of today’s commerce landscape, Twilio makes for an excellent long-term investment.
Snowflake
Businesses produce mountains of data, but storing it and interpreting it isn’t easy. Snowflake‘s (SNOW 7.08%) solution gives its clients the tools to efficiently store, interpret, and utilize their data to drive decisions. Snowflake has experienced strong customer and revenue growth. In its fiscal Q3, its revenue rose 67% year over year to $557 million, and the number of customers spending more than $1 million with it annually was up 94% to 287.
Snowflake is also masterful at getting its customers to increase their spending on its data software. Established customers spent $165 in the most recently reported quarter for every $100 they spent in the prior-year period.
The stock is by far the most expensive of this group, with a price-to-sales ratio of 23. However, its rapid growth rate, coupled with a market opportunity expected to be worth $248 billion in 2026, makes Snowflake an investment worth considering .
Investors should do their own research into these five companies to determine if they are suitable for their portfolios, but decades-long investment opportunities are prevalent in these young tech companies, and they are worth your time to read up on. You may find stocks that won’t just beat the market but crush it.