These 2 Stocks Have Plenty of Room to Run

Volatile stock markets can be great times to buy long-term winners. Many promising stocks are suddenly much more affordable following the growth-stock sell-off. These high-potential businesses aren’t exactly cheap, but their valuation and fundamentals leave plenty of room for big returns.

C3.ai

Artificial intelligence has quickly gone from science fiction to commonplace among tech companies. Machine learning and automation are unlocking all sorts of efficiencies and capabilities in the business world. While digital transformation is driving evolution in every industry, not all businesses have the need or ability to hire a team to build AI technology in-house.

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That’s where C3.ai (NYSE: AI) is emerging as a leader. Billionaire Thomas Seibel founded the company, and he brings tremendous experience to the table as an early executive at Oracle before successfully launching and exiting a CRM software business. Along with his talented team, Seibel aims to build an AI-as-a-service business that will lead the way in a lucrative new SaaS industry segment. C3.ai is staking its claim as the go-to solution for businesses that want AI software but can’t afford to build it in house.

The company has quickly established a foothold in the energy industry, but its goals are much broader. In its most recent quarter, C3.ai reported having 218 customers — up 82% year over year — from 15 different industries, showing management’s clear intention to expand into new verticals. That growth helped propel C3.ai’s revenue 42% higher last quarter, exceeding analyst forecasts and prompting an increase to its full-year guidance.

It hasn’t always been smooth sailing for C3.ai relative to investor expectations, but it’s hard to argue the company’s results have been mediocre. This is a growth machine with plenty of opportunity ahead of it.

But the stock is down 53% from its Dec. 2020 IPO price and nearly 75% from its all-time high. Investor skepticism is fair with that sort of steep decline, but the stock’s price-to-sales ratio also dropped from a sky-high 80 to 8.4, creating an opportunity for long-term bargain hunters.

If C3.ai is able to maintain its competitive position as the AI industry grows, then there’s tons of upside left here.

DataDog

DataDog (NASDAQ: DDOG) is a promising tech stock that combines elements of data analytics, artificial intelligence, and cybersecurity. Its product portfolio allows businesses to monitor and analyze their software, which leads to more efficient and secure operations. The ongoing digital transformation across the economy is making software the most important tool for businesses in every sector, which makes application monitoring services exceptionally valuable moving forward.

The company is capitalizing on that tailwind by delivering respected products and phenomenal growth. The company receives high marks from third parties such as Gartner, and its 130% net revenue retention rate shows how DataDog is retaining customers and expanding its relationships with them. That helped fuel the company’s 84% revenue growth in the fourth quarter, its third consecutive quarter of accelerating growth. Management is guiding for 48% growth in 2022.

DataDog sees a number of new service areas it can build into its platform in the future, allowing the company to generate more revenue from existing customers while also expanding the number of customers it serves.
We’re already seeing this in action as some of DataDog’s larger customers are adding new products to their agreements as they become available. It now has more than 215 customers that generate at least $1 million in annual recurring revenue.

The stock is still expensive with a price-to-sales ratio of 40 and a forward price-to-earnings ratio around 255. It’s fair to say this premium valuation reflects the tremendous opportunity Datadog has and how bullish investors are, but that also means much of its return potential is already baked into the current price. This also makes the stock more vulnerable to volatility in our current market. All that said, the leader in the application monitoring industry is likely to blow past its current $41 billion market cap in the long term, leaving plenty of room for the stock to grow.

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Ryan Downie has no position in any of the stocks mentioned. The Motley Fool owns and recommends C3.ai, Inc. and Datadog. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

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