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The broad-based S&P 500 and the tech-heavy Nasdaq Composite fell into bear market territory more than a year ago, and the recession fears behind that drawdown have only become more intense.
But Wall Street is still bullish on Datadog (DDOG -0.64%) and Zscaler (ZS -0.58%). Most analysts recommend both stocks right now, and some expect shareholders to see big gains in the next 12 months.
According to CNN Money, the highest price target on Datadog is $127 per share, which implies 82% upside from its current price. The highest target on Zscaler is $225 per share, or 113% upside from its current price.
Here’s what investors should know about these growth stocks.
1. Datadog
Datadog provides observability software to development, operations, and security teams. Its platform includes more than a dozen applications that give businesses real-time visibility across their IT ecosystems, helping them ensure the performance and security of crucial applications and infrastructure.
Datadog simplifies deployment, and its artificial intelligence (AI) engine automates anomaly detection, root-cause analysis, and other tasks to accelerate problem resolution.
The company’s greatest asset is its capacity for innovation. In 2018, it became the first software vendor to unify the three pillars of observability (i.e., metrics, traces, and logs).
Since then, the company branched into new areas like user-experience monitoring, developer testing, and cybersecurity, and it consistently wins praise from industry experts. IT consultancy Gartner recently listed Datadog as a leader in application-performance monitoring and observability, citing its strong portfolio and powerful AI engine. Similarly, Forrester Research recognized the company as a leader in AI for IT operations.
Datadog reported strong results last year. Revenue rose 63% to $1.6 billion, and cash flow from operations jumped 46% to $418 million.
The company should also be able to maintain that momentum for years to come. Migration to the cloud and other digital-transformation projects are making IT more complicated, creating a need for observability software.
Datadog is particularly well positioned to benefit with the broad scope of its platform. It provides businesses with all the tools necessary to keep their IT performing and secure, rather than focusing on a single aspect of the observability market, like some vendors.
Datadog believes its addressable market will reach $62 billion by 2026, and with shares trading at 13.5 times sales — well below the three-year average of 34.3 — there is plenty of upside for patient shareholders.
But the key word is patient. There is no guarantee of an 82% return this year. Investors should plan to hold this stock for at least three to five years.
2. Zscaler
Zscaler provides solutions for network security, and cloud workload protection. Its platform — known as a security service edge (SSE) — improves on legacy network security solutions by inspecting traffic and enforcing zero-trust policies in the cloud rather than in corporate data centers. That ultimately allows businesses to protect and connect their workers, applications, and Internet of Things devices more effectively, without the cost or complexity of on-premises security.
Zscaler runs the largest network security cloud in the world. Its AI engine learns from 300 billion security signals each day, and that unparalleled scale allows its SSE platform to provide better threat protection than other vendors, according to management.
It also creates a powerful flywheel effect. Threats identified for one client are blocked for every other client across the platform, meaning each new customer creates value for every other customer.
Zscaler delivered solid financial results over the past year, especially with businesses spending more cautiously. Revenue rose 57% to $1.3 billion, and cash from operations jumped 53% to $398 million. However, the company has hardly scratched the surface of its $72 billion serviceable market, leaving plenty of potential upside, and shareholders have good reason to be optimistic.
IT consultancy Gartner has recognized Zscaler as a leader in the SSE industry, and believes that businesses’ adoption of SSE products will reach 80% by 2025, up from 20% in 2021. That tailwind should help Zscaler make headway on its significant market opportunity.
Currently, the stock trades at around 11 times sales, near its cheapest valuation in the last five years. This growth stock is worth buying at that price, but only for patient investors who plan to hold for at least three to five years. The odds of a triple-digit return in the next year are remote given the uncertain economy.
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