In broad sell-offs, like we have seen in the tech sector over the past few months, it is important for long-term investors to focus more on the business performance, not the stock performance of the companies they are interested in. Finding high-quality companies that are operationally strong while the stock is sinking can sometimes lead to nice buying opportunities.
All three of these stocks are down at least 30% from their 52-week highs and more than 20% from their closing prices on Dec. 31. And yet all three businesses are established companies seeing success in their business operations. They’ve just gotten caught up in a broader market sell-off. These three stocks are each worth a closer look are might even be no-brainer buys today.
Shopify is aiding the rise of small businesses by providing software and an operating system for small- and medium-sized businesses (SMBs) to start, manage, and grow their retail businesses (especially online). With over 1.7 million merchants on the platform, Shopify has become a core platform for SMBs. Shopify helps merchants manage their business across both digital and physical storefronts, and that includes social media and advertising on platforms like TikTok.
Shopify can power almost anything for SMBs. It has services for payment processing, it can offer loans, and it recently launched a service that helps SMBs expand internationally. This consistent innovation and its focus on customer growth are not stopping anytime soon: The company has half a dozen services being built for the future, including a delivery fulfillment service across the U.S.
As a result of the company’s efforts, Shopify is seeing strong growth. In the third quarter of 2021, the company hit $400 billion in cumulative gross merchandise volume, and it took just 16 months to go from $200 billion to $400 billion (after taking almost 15 years to reach $200 billion GMV), which shows how rapidly Shopify’s services are being adopted today.
As Shopify’s customers add more Shopify services, it becomes harder to switch away. Not that they would want to. Other services, like Amazon, tend to promote in-house products on their site ahead of an SMB’s product, which hurts growth. Shopify doesn’t have its own retail products to compete with and instead focuses on helping its merchants grow (which in turn helps Shopify grow).
Despite this strong business and its past success, Shopify stock has been hammered lately. Shares are down almost 38% from their 52-week highs. Such a disparity between the stock price and the business performance makes this a buying opportunity.
Datadog is another stock to admire, mainly because its services are so critical to its customers. The company offers observability and security tools to monitor the uptime and performance of cloud applications. This service is invaluable to many companies because uptime and security are mission-critical to any cloud-native business. With dozens of tools that help monitor performance, Datadog makes it easy for companies to keep an eye on thins and be ready when something goes wrong. Unsurprisingly, consumers are willing to pay up for these products: 1,800 customers spent over $100,000 with Datadog in its most recently reported quarter.
Like Shopify, Datadog makes it easy for consumers to become more entrenched in its product ecosystem by continuously developing more mission-critical services and products. As a result, Datadog sees customers becoming more integrated into the product ecosystem. In the third quarter (ending Sept. 30), Datadog reported that 31% of its customers use four or more products, which was up from 20% of customers in the year-ago quarter. The more entrenched they become. the lower the customer churn rate falls (it was in the mid-single digits in Q3).
The stock is trading near 48 times sales — an extremely expensive multiple for any company — but it has been running around that rate for more than 18 months now. Since early 2020, Datadog has not traded below 30 times sales, likely because of how strong the business has consistently performed over the past two years. Sometimes expensive companies are worth paying up for because of how bright their future looks, and with an estimated total addressable market of $53 billion by 2025, I think Datadog and its current annual revenue of just under $1 billion has a sizeable opportunity for growth that is worth paying up for.
As of this writing, Roku stock is trading at about 10 times sales — a valuation that the company has not traded at since mid-2019. The stock is also trading about 63.7% below its 52-week highs set in mid-July. With such a drop, you would think that Roku’s business must be in trouble, but the streaming platform has seen plenty of success recently.
The company has performed especially well with its Roku Channel, which was among the top five most-popular services on its platform in the third quarter. Roku’s in-house channel (as opposed to outside streaming services that partner with Roku to offer access to their channels) has been lucrative because it doesn’t have to share as much of the revenue it generates with partner companies like Netflix. Ad revenue earned on the Roku Channel stays in-house, and that has helped ad revenue has become the company’s biggest source of income. Streaming hours on the Roku Channel doubled year over year in Q3, and with major ramp-ups in both acquired and original content, viewership on the Roku Channel could continue growing.
With stable hardware and software-licensing business segments and appealing growth avenues like the Roku Channel, the stock is a steal at 52-week lows, making it an opportunistic bargain for long-term investors. I wouldn’t be surprised to see Roku massively outperform the market this year and be a great stock to own in 2022 and beyond.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.