Software companies are among the fastest-growing stocks in the technology sector for three simple reasons: software is easier to distribute than hardware, it engages customers with ongoing subscriptions, and it is at the forefront of long-term growth trends such as artificial intelligence (AI), analytics, and automation.
However, software stocks can also be expensive, volatile and difficult to understand, and are highly exposed to the headwinds of inflation and interest rates. That's why today I'm highlighting three high-growth software stocks that are still worth buying even as many investors shift back to safer blue-chip stocks.
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1. Palantir
Palantir (WKN: A2QA4J ) provides data mining and analytics services to large government and enterprise customers. Its Gotham platform primarily serves U.S. Government agencies, while its Foundry platform uses the technology to help large companies streamline processes and make data-driven decisions.
Palantir's revenue increased by 25% in 2019 and grew by 47% in 2020. Palantir expects revenue growth of 40% in 2021 and at least 30% annual growth from 2021 to 2025. This optimistic long-term forecast means that annual revenue of 1.53 billion. US dollars in 2021 to over 4 billion. U.S. Dollars will more than triple in 2025.
Palantir is not yet profitable on a GAAP basis, but adjusted gross and operating margins have been steadily increasing, and free cash flow (FCF) turned positive in 2021. Analysts do not expect the company to be profitable for at least the next two years.
Palantir stock trades at 17 times next year's revenue. Palantir is certainly not a value stock yet, but compared to other high-growth technology stocks, the valuation is reasonable. Cloudflare, for example, is growing only slightly faster than Palantir, but is trading at 50 times next year's revenue.
If you believe Palantir can achieve its goal of becoming the "default operating system for data across the U.S. Government" while attracting more enterprise customers, this might be a good time to buy more shares of this high-growth stock.
2. Zendesk
Zendesk (WKN: A1115T ) offers cloud-based customer relationship management (CRM) tools for about 111.800 customers worldwide.
Unlike Salesforce , which offers a full suite of CRM tools for large enterprises, Zendesk provides simpler chat-based customer support and ticketing services tailored for use by smaller companies. Growing companies can also integrate Zendesk's services with Salesforce's platform.
Zendesk's revenue grew 26% in fiscal 2020, and the company expects growth of 29% to 30% this year. The company ended the most recent quarter with a net expansion rate on a dollar basis of 122%, exceeding its own long-term target of 110% to 120%.
Zendesk is not yet profitable on a GAAP basis, but adjusted gross margins are up. Non-GAAP revenue grew 68% in 2020, and analysts expect another 25% revenue growth this year.
Zendesk's stock has stumbled over the past three months as investors fretted over its proposed acquisition of Momentive , the owner of Survey Monkey. This full acquisition will likely dilute Zendesk shares and squeeze margins, but it should also significantly expand the company's ecosystem.
Zendesk's stock is trading at just seven times next year's revenue after a recent drop in share price. Salesforce trades at the same price-to-sales ratio, though growth is slower. This valuation gap suggests Zendesk stock could rally once investor concerns about the Momentive deal are resolved.
3. Datadog
Datadog's (WKN: A2PSFR ) platform enables IT professionals to monitor the performance of various servers, databases, cloud services and mobile applications in real time on their unified dashboards. This approach breaks down silos, saves a lot of time and makes it much easier to identify potential problems.
Datadog's growth reflects its disruptive potential. The company's revenue grew 83% in 2019 and 66% in 2020. The company expects its revenue to grow about 65% this year. The company's net retention rate exceeded 130% last year, and the number of customers generating annual recurring revenue (ARR) exceeded 100.000 US dollars generated, increased 66% in the last quarter compared to the previous year.
Like Palantir and Zendesk, Datadog is still unprofitable by GAAP standards. Gross margins are also pressured by higher cloud hosting costs. However, on a non-GAAP basis, Datadog became profitable in 2020. The company expects its non-GAAP earnings to rise about 80% this year as it cuts back on cloud spending.
Datadog's stock isn't cheap at 32 times next year's revenue. However, the impressive growth rates and disruptive potential might justify this higher valuation. This could make the company a promising long-term investment.
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Leo Sun owns shares of Palantir and Salesforce. The Motley Fool recommends shares of Cloudflare, Datadog, Palantir Technologies, Salesforce.Com and Zendesk . This article was published on 6.1.2022 on Fool.Com and has been translated for our German readers.
