The stock market is finding support right now from two directions, the feeling that the Federal Reserve is turning slightly dovish and will be a little less aggressive in raising interest rates going forward, and second-quarter earnings coming in better than analysts had feared.
The S&P 500 could still be down 10% for the year, but the index has rallied 17% since its mid-June low, and with the macro environment looking more favorable, investors will be hoping the change in sentiment isn’t temporary.
Against this backdrop, Kash Rangan, a 5-star analyst at Goldman Sachs, picked two stocks that show plenty of potential for big gains over the next year — on the order of 40% or more, he says. Actually, Goldman’s point is not outlandish. Running tickers TipRanks database, we found that each boasts a consensus rating of Strong Buy from the broader analyst community. Let’s take a closer look.
Dynatrace (DT)
We will start in the world of cloud infrastructure. Dynatrace is a leader in IT observability – the ability to assess the current state of a system based on the data it generates, such as metrics, logs and traces. Observability is considered an essential component in running a successful company these days, and the cloud surveillance market is expected to grow significantly over the next few years. This is no surprise as enterprises are migrating in increasing numbers to the more efficient environment of the cloud, making infrastructure software easier to sell. The company boasts a list of major clients that includes Kroger, SAP, Carnival and Experian, among many others.
That there is strong demand for Dynatrace’s cloud monitoring platform and applications was evident in the latest quarterly report – for fiscal Q1 2023 (June quarter). Specifically, revenue rose 27.4% year over year to $267.27 million, beating Wall Street expectations of $261.83 million. Non-GAAP EPS of $0.18 also beat the consensus estimate of $0.17.
of Goldman Kash Rangan liked the look of the footprint, writing, “The results go a long way in confirming our contention that Dynatrace is a unique software infrastructure provider as the company’s technology stack is deployed by customers not only for application monitoring and production environments, but also both when used in business office cases (eg real-time metrics for digital assets going to market) and in development environments. As such, Dynatrace’s strategic position is improving and customers are deploying Dynatrace more widely and also purchasing new modules as the Dynatrace product portfolio expands.”
These bullish comments underlie Rangan’s Buy rating, while the analyst’s price target of $62 leaves room for 12-month gains of ~47%. (To watch Rangan’s record, Press here)
Overall, the Strong Buy consensus rating indicates that Wall Street broadly agrees with Goldman’s view here. Dynatrace has 13 views recorded, including 12 buys and 1 hold. Shares are priced at $42.19, and their average price target of $51.73 suggests a one-year upside potential of ~23%. (See the Dynatrace stock forecast at TipRanks)
Datadog, Inc. (DOG)
The second Goldman pick we’ll look at here is Datadog, which also operates in the cloud monitoring space. Datadog offers customers the tools they need to monitor, track and secure their cloud-based platforms and applications in real-time. Datadog’s tools include automation, monitoring and measurement, source control and error tracking, as well as troubleshooting and optimization. The Datadog platform also allows customers to seamlessly navigate through logs, metrics and tracking to best utilize collected data for proactive management.
All this may sound like a mouthful and is actually only a small part of what Datadog does, but one thing is clear: it is a service that is essential in today’s increasingly digitized work environment. This can be seen from the company’s revenue and earnings over the past few years, which have mostly shown a consistent pattern of consecutive quarterly earnings.
This trend was visible when DDOG released 2Q22 earnings earlier this month. Revenue rose 74% year-over-year to $406.14 million, beating the Street estimate of just under $382 million. Non-GAAP EPS of $0.24 more than doubled from the same period last year, while beating the $0.15 expected by analysts. And for the full year, the company is targeting revenue between $1.61 billion and $1.63 billion and adjusted net income between $0.74 and $0.81.
Goldman’s Rangan sees the outlook as conservative, but has no doubts about the bullish thesis. He wrote: “We believe that with a long-term secular shift to the public cloud, as supported by our recent IT survey report, infrastructure software spending remains stable. Based on the strength of Datadog’s expanding product portfolio that addresses critical aspects of customer cloud migration, coupled with a solid profitable business model that generates increasing FCF margins along with hyper-growth, we believe it is poised to grow into a superior infrastructure software business.”
Overall, Rangan thinks DDOG stock has some way to go, and by some we mean 88% upside. That’s the return investors are looking at if the stock reaches Rangan’s $214 price target. No need to add, the analyst rating is Buy.
As for Wall Street, the consensus is that DDOG stock deserves a Strong Buy rating. The stock has 19 recent analyst reviews recorded and they break 16 to 3 in favor of buys over holds. With a trade price of $113.54 and an average target price of $143.13, the stock has a potential upside of 26% over the next year. (See the Datadog stock forecast at TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.