Investing in the tech sector has minted many millionaires over the past decades. But with some of those companies now trading at trillion-dollar valuations, it would probably be smarter to check out the market's smaller tech companies for future millionaire-making gains. When seeking out another potential millionaire-maker, investors should focus on companies carving out defensible niches, establishing sticky ecosystems, and growing rapidly.
Investors should seek out companies that can consistently grow their revenue at a compound annual growth rate (CAGR) of at least 20%, since that growth trajectory could churn a modest $25,000 investment into $1 million over a 20-year period. But they also can't be overvalued meme stocks.
That might seem like a lot to ask for, but I believe these three high-growth stocks check all the right boxes: Datadog (NASDAQ: DDOG), Monday.com(NASDAQ: MNDY), and Cloudflare(NYSE: NET).
Image source: Getty Images.
1. Datadog
Many large companies install a wide variety of software and services across multiple computing platforms. That fragmentation can make it difficult for IT professionals to effectively monitor an organization's entire software infrastructure.
Datadog addresses those challenges by monitoring the diagnostic data from those applications and displaying the real-time information on its unified dashboards. That silo-busting approach makes it much easier for IT professionals to spot potential issues. Its generative AI assistant, Bits AI, further simplifies and accelerates that process.
From 2019 to 2023, Datadog's revenue grew at a CAGR of 56%. Its number of large customers (ones that generate at least $100,000 in annual revenue) jumped from 858 in 2019 to 3,190 in 2023. It also turned profitable on a generally accepted accounting principles (GAAP) basis in 2023.
Datadog faces some macro headwinds and its business is gradually maturing, but analysts still expect its revenue and GAAP earnings per share (EPS) to grow at a CAGR of 23% and 77%, respectively. It might not initially seem like a bargain at 68 times its forward adjusted earnings, but it could still have plenty of room to grow as the IT observability market expands.
2. Monday.com
Monday.com helps companies develop their own work management apps to automate tasks on its cloud-based platform. These apps can either be built from scratch or created through its pre-built "recipes," and they can be directly integrated into existing software applications. Its Monday AI platform also enables its customers to weave AI features into their custom apps.
From 2021 to 2023, Monday.com's revenue rose at a CAGR of 54%. Its number of big customers (ones that generate over $50,000 in annual recurring revenue) nearly tripled from 793 to 2,295. Its adjusted operating margin also turned positive in 2023, and it maintained a healthy net dollar retention of 110% in its latest quarter.
From 2023 to 2026, analysts expect Monday.com's revenue to grow at a CAGR of 28% as more companies accelerate their digital transformation strategies. It's also expected to turn profitable on a GAAP basis in 2024 and to grow its GAAP EPS at a CAGR of 118% over the following two years. It might look a bit pricey at 65 times its forward adjusted earnings, but its balanced exposure to the booming cloud, AI, and digital transformation markets might justify that premium valuation.
3. Cloudflare
Cloudflare is a cloud-based content delivery network (CDN) provider. It accelerates the delivery of digital content for websites by storing cached copies of that content on its edge networks, which are located closer to the visitors than their origin servers.
Cloudflare also shields websites from bot-driven attacks with tools for verifying human users. Over time, it believes it can become a "water filtration system" for the modern internet by protecting websites and their users from malicious attacks. In 2020, it launched a unified platform called Cloudflare One to bundle together its CDN and security services.
From 2019 to 2023, Cloudflare's revenue grew at a robust CAGR of 46%. It also maintained a healthy dollar-based net retention rate of 110% at the end of its latest quarter. From 2023 to 2026, analysts expect its revenue to grow at a CAGR of 27%. It isn't profitable on a GAAP basis yet, but it's gradually narrowing its net losses.
Cloudflare's growth is also cooling off as its business matures amid the near-term macroeconomic headwinds. However, the market's demand for its services should keep rising as companies roll out more content-heavy websites and fend off more bot-based attacks. It isn't cheap at 147 times its forward-adjusted earnings, but it has plenty of growth potential.
Don’t miss this second chance at a potentially lucrative opportunity
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Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare, Datadog, and Monday.com. The Motley Fool has a disclosure policy.
