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2 Stocks to Buy to Capitalize on Data Transformation

With more data being produced by the day due to the shift to the cloud from on-premise systems, companies around the world are starting to struggle to manage it all and make the most of it. IDC, a subsidiary of Blackstone, estimates that digital transformation investments will approach a total of $6.8 trillion -- growing at a compound annual rate of 15.5% until 2023.

Two companies have the opportunity to capitalize on this investment growth by helping businesses. While they are doing so in very different ways, both are crucial to managing a successful enterprise. As the world obtains more data and digital information, these stocks should enjoy growth because of it.

Image source: Getty Images.

Workiva: Focusing on the necessities

Workiva (NYSE: WK) allows teams to navigate through the reporting process while increasing accuracy and efficiency and maintaining compliance throughout many different financial filings. It allows a business to consolidate all of its data onto one platform, making it easier to retrieve and report accurately. If you have ever read through Snowflake's S-1, for example, you have read something that was facilitated by Workiva's IPO filing solution.

The company does more than just handle IPO filings. It also provides environmental, social, and governance (ESG) reporting, internal audit management, Securities and Exchange Commission (SEC) reporting, and other filings that companies are obligated to disclose. Its ​​customers use Workiva to create, review, and publish documents and reports with greater control, consistency, accuracy, and productivity. The company allows teams to do this collaboratively, increasing efficiency and mitigating risks of inaccuracies in their reports, which is crucial; 75% of the Fortune 500 trust Workiva to help them do this.

This trust from some of the largest companies in the world has made it a leader in its industry, according to the Forrester Wave report, and this dominance has led to strong financial success. In the second quarter of 2021, revenue grew 26% from the year ago to $106 million, with 13% of its customers spending over $150,000. Its customer count grew 10%, with a strong 2021 market for special purpose acquisition companies (SPACs) and IPOs being a driver of both revenue and customer growth.

The company is not profitable (it lost $9.5 million in the second quarter of 2021), but its growth potential and recurring revenue will likely allow the company to maintain its trend toward profitability. Many of Workiva's customers will have to continue filing financial documents, and it's unlikely they will switch from Workiva; the company's churn rate is just 5%.

Workiva is likely the first place that companies go to improve their reporting processes because of its market leadership. So as long as there are new companies going public in the U.S., Canada, the Asia-Pacific region, and Europe -- all places where the company operates -- it will have a new supply of customers. Even though it trades at 19 times sales, Workiva is likely to be one of the major benefactors of an increasing amount of data that companies receive and need to report to regulators.

Datadog: An innovation facilitator

With increases in amounts of data, it can be difficult for a company to monitor the performance of its applications and infrastructure. It is crucial that a company's applications are running properly, but with a growing abundance of data, it can be hard for IT teams to spot those problems right away. This is one aspect of observability that Datadog (NASDAQ: DDOG) helps with.

The company has enabled IT teams to monitor performance and manage everything they need -- from infrastructure to user experiences -- all on one platform. Users are able to spot problems and realize key insights to improve their software, which helps developers and IT teams immensely. This value proposition is likely why Datadog has a net revenue retention rate of over 130%, and why its number of customers spending over $100,000 grew nearly 60% to 1,610 during the second quarter of 2021 compared to the year-ago quarter.

The company grew revenue 67% to $234 million in the quarter, and its net income margin was just negative 4% for the quarter. With gross margins of 76% and strong free cash flow -- its free cash flow so far in 2021 has grown 127% to $42.3 million from the first six months of 2020 -- the company is on track to achieve continuous profitability.

Like Workiva, Datadog's dominant leadership position according to Gartner's 2021 Magic Quadrant for Application Performance Monitoring and its strong financial performance command a hefty valuation of 63 times sales, which would make any investor do a double-take. However, the company has the growth potential to back up that valuation. Datadog is known for creating new solutions (it has come up with two new monitoring platforms since August, adding to its 13 solutions). If the company can make its services even more vital to IT teams than they already are, it's likely to see amazing success for many more years.

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Jamie Louko owns shares of Datadog and Snowflake Inc. The Motley Fool owns shares of and recommends Datadog, Snowflake Inc., and Workiva. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.


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