Plenty of high-growth tech stocks have been hit hard in 2021 despite stellar business performances. Upstart was recently cut in half in a matter of weeks, while Pinterest has had a slow, painful drop this year. However, many of these stocks have been beating expectations and running their businesses incredibly well.
A small handful of stocks have had impressive price appreciation in 2021 while also executing perfectly. These businesses are often ones to hold for the long term, for winners like these could continue to win. Two perfect examples of these stocks are DigitalOcean (NYSE:DOCN) and Atlassian (NASDAQ:TEAM). Here’s why these two stocks deserve a spot on your watch list.
DigitalOcean: The people’s cloud provider
Many small businesses or even individual developers working on a side project have cloud needs, but typically not the expert-level services that Amazon‘s (NASDAQ:AMZN) AWS or Microsoft‘s (NASDAQ:MSFT) Azure have. Rather, all these small and medium-sized businesses (SMBs) need are a few critical services like managed Kubernetes or app development to get their cloud presence up and running. More importantly, these SMBs want simplicity, products that are easy to use, and transparency across the entire experience.
DigitalOcean has recognized and met these desires, so it is quickly becoming the main cloud provider for SMBs. The company has almost 600,000 customers across the world, with the majority of them being SMBs or independent developers.
The company’s focus on this niche market has been successful so far: Third-quarter revenue grew 37% year over year to $111 million, and the company lost $2 million — representing 3% of gross profit — compared to $10 million (23% of gross profit) one year ago. It also increased its net retention rate from 104% in the year-ago quarter to 116% today.
This impressive growth has been reflected in the stock price. Shares of DigitalOcean are up 139% year to date, even after the company took a 22% hit off its high. The company’s valuation also reflects its stellar performance: It is valued at a lofty 24 times sales.
What I am most impressed with is DigitalOcean’s potential over the next decade. The company expects that its market opportunity will reach $116 billion by 2024, growing 27% annually. Because of its immense success so far and widespread adoption of its products, DigitalOcean could seriously disrupt AWS and Azure in this niche market, and while the big players do have SMB offerings, DigitalOcean seemingly trumps them both. If the company can become widely known as “the SMBs cloud provider,” then it could push AWS and Azure aside, allowing itself to capture the vast majority of this niche market and grow immensely over the next five years.
Atlassian: Flawless performance
Since it was founded in 2002, Atlassian has been trying to “unleash the potential of every team” by creating tools that enable frictionless collaboration for enterprise teams. Atlassian started as an on-premise provider with server products, but the company saw that the world was heading to the cloud and it made a move to shift there.
This decision has been a smart one, and the company has seen plenty of success moving to the cloud. The company announced the end of its server products one year ago; today it is seeing 53% growth in its cloud revenue driven by strong cloud adoption from its existing customers and almost 12,000 new customers — representing 5% growth.
With transitions as big as this, however, companies have to take one step back to move forward, and Atlassian took a step back (or three) in its profitability in order to be able to make this move. The company lost $400 million in Q3 compared to just $21 million one year ago. This loss is not factored much into the company’s valuation or its stock price performance in 2021. Shares of the Atlassian have risen 68% year to date, and the company is valued at 44 times sales.
While this does not look good, it is simply an expense that the company must take today in order to continue moving forward as a cloud-based company. The bright side is that the company has plenty of cash to subsidize these losses: It generated over $71 million in free cash flow in Q3 and it has a cash balance of $1.5 billion.
Despite its sky-high valuation and severe losses, Atlassian has a bright future. This transition has shown investors that the company is skating to where the puck will be, not where it is right now, which should give investors confidence about its ability to succeed in the future. Investors should be excited about Atlassian’s future with the cloud, which is why I plan on holding the stock for the next decade — and why I think you should put this company on your watch list and potentially do the same.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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