With interest rates rising, recession fears and consumer spending weakening, the outlook for the stock market is bleak and many growth stocks are selling strongly. However, most of the market is preoccupied with shorter timeframes and stock prices tend to reflect an outlook of only a few months. This gives individual investors a key advantage over investment firms as we can afford to take a longer term view.
Zooming out with a three to five year investment mindset reveals that many stocks are selling at bargain prices. Two that I have in mind are The trading post (TTD -4.58%) and Datadog (DDOG -4.37%). Both stocks are trading down more than 50% from their all-time highs, but have seen little to no downturn in business. This sustained growth makes them excellent candidates to outperform as the market recovers. Let’s find out a bit more about these two stocks and why you might regret not buying them during the current downturn.
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1. The Trading Post
The advertising industry is massive. The International Data Co., a marketing intelligence firm, estimates that global ad spending in 2019 was around $750 billion. Even though it’s a massive market, the business is simple: one entity sells advertising space (whether it’s a billboard, TV commercial, or website), and another buys it to promote a product or service. The Trade Desk software analyzes these opportunities for its clients to ensure they are reaching their target audience and choosing the best ad placement for a given viewer.
The Trade Desk focuses on digital advertising spaces such as connected TV, mobile and podcast audio. Using its internal, third-party and proprietary data inputs, its software can decide how much to pay for an ad for a given user. Because of this, advertisers get better conversion rates while spending less on irrelevant ads.
Companies need to collect information about their users to buy targeted advertising. But this data tracking is controversial because some of the information companies collect may be too revealing. The Trade Desk’s solution is its proprietary unified ID 2.0 (UID2) software. It gathers all relevant information about consumers while preserving their privacy.
The Trade Desk delivered strong revenue growth of 43% year-over-year in the first quarter and an adjusted profit before interest, tax, depreciation and amortization (EBITDA) margin of 38%. It would have been profitable for the quarter, but a $66 million bonus to its CEO for long-term performance cost The Trade Desk $15 million. Without it, The Trade Desk would have posted a net profit margin of 16% according to generally accepted accounting principles (GAAP).
Ad spending has historically fallen during recessions, forcing investors to sell stocks. But with The Trade Desk transforming the way digital ads are purchased, it will instead experience weaker growth during a hypothetical recession. Investors can choose a big company with a vast growth opportunity trading at 66 times free cash flow (up from over 160 six months ago) by taking a long view with The Trade Desk.
Even though Instantaneous issued ad revenue warnings, investors should realize that Snap doesn’t speak for the broader market. Just because one platform (whose ad serving is very annoying to users) is having trouble, doesn’t mean all ad companies do.
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2. Data Dog
As more and more companies migrate to the cloud and use different software, it becomes crucial that the programs interact well with each other. Monitoring this manually would be a nightmare, and the only way to know something is wrong is if there are multiple complaints. Datadog allows its users to see how these programs interact while automatically fixing problems.
While many software-as-a-service companies have grown slowly, Datadog hasn’t. First quarter revenue increased 83% year over year to $363 million, while generating a free cash flow (FCF) margin of 36%. FCF is crucial if economic conditions continue to deteriorate, as it allows a company’s operations to fund the business without outside help.
Datadog stock is a little more expensive than The Trade Desk, with a price/FCF ratio of 93. However, it is also growing faster than The Trade Desk.
Management expects to grow 2022 revenue by 56% over 2021 totals. As many companies tighten spending, investors should pay attention to the second quarter report in a few months to see if Datadog’s business is improving. affected. But spending on its product is unlikely to be reduced given the amount of functionality Datadog brings to IT teams.
Image source: Getty Images.
Datadog is in the early innings of its industry. He and The Trade Desk both have huge market opportunities. Investors should not become myopic for fear of being in a bear market. Both of these companies should be winners in the long run; you just need to hold the shares until the companies no longer operate at a high level.
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