The S&P 500 (^GSPC 1.26%) just had its second-strongest first quarter in the past decade. The index advanced 10.2% during the three-month period that ended in March, notching 22 record highs along the way.
Meanwhile, valuations across the stock market have become much more expensive, but buying opportunities still exist. For instance, Datadog (DDOG -0.95%) and Uber Technologies (UBER 0.96%) have strong positions in their respective industries, both stocks are priced reasonably given their growth prospects, and shares are relatively affordable. Indeed, investors can purchase a full share of each stock for less than $200.
Here's why that's a smart move.
1. Datadog
Datadog sells observability and security software that lets businesses monitor and analyze the performance of IT infrastructure and applications. Its platform integrates 19 products to improve collaboration and boost productivity across operations and development teams. The company has also embedded its software with artificial intelligence capabilities that surface proactive alerts and automate root cause analysis to further improve efficiency.
Datadog is a recognized leader in several observability software verticals, including application performance monitoring and artificial intelligence for IT operations. The company also has a strong market presence in server monitoring, cloud infrastructure monitoring, and database monitoring. Additionally, Datadog ranked second on the 2023 Fortune Future 50 list, an annual assessment of the world's largest companies based on their long-term growth prospects.
Datadog delivered strong results in the fourth quarter. Its customer count increased 18% and the average existing customer spent in excess of 10% more. In turn, revenue increased 26% to $590 million and non-GAAP net income more than doubled to reach $0.44 per diluted share. Mark Murphy at JPMorgan Chase commented on the quarter, calling it the "best bookings inflection across software" thus far.
To elaborate, many software companies struggled as economic uncertainty suppressed business spending in recent years, but Datadog has clearly regained some momentum. Indeed, remaining performance obligation -- which measures future revenue -- soared 74% in the fourth quarter, indicating that revenue growth could accelerate in the coming quarters.
Looking ahead, the cloud monitoring market is forecasted to grow at 21% annually through 2030, and the broader monitoring tools market is projected to expand at 18% annually during the same period. Against that backdrop, Wall Street expects Datadog to grow sales at 25% annually over the next five years.
That consensus estimate makes the current valuation of 20.1 times sales seem reasonable, especially when the three-year average is 28.5 times sales. Datadog carries a consensus rating of "buy" among Wall Street analysts, and its median price target of $150 per share implies 25% upside from its current share price of $120. Patient investors can buy a small position in this stock with confidence.
2. Uber Technologies
Uber breaks its business into mobility, delivery, and freight. Its mobility platform connects users with transportation, primarily ridesharing services. Its delivery platform connects consumers with food and package delivery services. And its freight platform connects shippers with carriers to provide on-demand logistics services. Uber is the largest ridesharing services provider and the second largest food delivery services provider in the U.S., according to Bloomberg.
Uber benefits from a network effect and cross-platform synergies. The mobility and delivery platforms become more compelling as more consumers and drivers participate. But Uber also has an increasingly large opportunity to promote cross-platform adoption as each ecosystem expands. The company is leaning into that efficient strategy. For instance, 31% of first delivery trips come from the mobility app and 22% of first mobility trips come from the delivery app.
Uber reported solid results in the fourth quarter. Monthly active platform consumers increased 15% to 150 million. Revenue rose 15% to $9.9 billion, driven by strong growth in mobility and modest growth in delivery, offset by a decline in freight sales. On the bottom line, GAAP net income jumped 128% to $0.66 per diluted share due to disciplined expense management.
Going forward, Uber is well positioned to maintain that momentum. The ridesharing market is forecasted to grow at 16% annually through 2030, while the online food delivery market increases at 19% annually during the same period, according to Grand View Research. That gives Uber a good shot at annual sales growth in the mid-teens. Indeed, Wall Street expects the company to grow sales at 14% annually over the next five years.
In that context, its current valuation of 3.9 times sales seems reasonable, despite being a slight premium to the three-year average of 3.6 times sales. Indeed, Uber carries a consensus rating of "buy" among Wall Street analysts, and its median price target of $90 per share implies 30% upside from its current share price of $69. Patient investors should feel comfortable buying a small position in this growth stock today.
