2 tech stocks to buy now are down 64%

In the year As we prepare to close out 2022, the generally bearish sentiment of the stock market, especially regarding tech stocks, does not seem to be improving.

That may be disappointing for those short-term focused and waiting for a “Santa Claus” parade, but for patient investors looking to build long-term wealth, now is an opportune time to open positions in high-quality businesses. Here are two such businesses worth watching closely. Digital Ocean (DOCN 2.53%) And MongoDB (MDB 2.23%).

Digital Ocean: Relatively small in size, mature in outlook

DigitalOcean provides low-cost cloud hosting services for small and medium-sized businesses. A key building block of the digital economy, the cloud makes it easier for customers to focus on their products and services rather than worrying about technology infrastructure.

The company still recently hit the public markets, but you wouldn’t guess it’s too young to see its performance.

Despite a difficult macro environment, DigitalOcean reported excellent third quarter results. Revenue grew 37 percent year-over-year, and annual recurring revenue — an indicator of a company’s cash flow stability — increased 41 percent. The number of customers spending more than $50 a month on Digital Ocean Services rose 50 percent to 142,000, and average revenue per user grew 28 percent.

Unlike many early stage growth companies, DigitalOcean is free cash flow positive. In the year Free cash flow margin was 6% in 2021, and management expects this to grow to 11% for the full year 2022. He estimates that revenue will be less than $600 million this year.

Image source: Getty Images

For a relatively small company serving vulnerable customer types during an economic downturn, DigitalOcean 2022’s performance has been remarkably resilient. And that is no accident. It has developed a diverse customer base in 165 countries and several industry verticals. That difference limits the damage.

In addition, DigitalOcean has mastered a low-cost service delivery model. It provides essential services to its customers at low prices, which creates a compelling return on their investment. Finally, the usage-based model allows customers to manage their spending if they choose, making it a value-based and customer-centric service.

Digital Ocean’s recent acquisition of Cloudways makes it an even stronger business. The acquisition complements the company’s do-it-yourself cloud-based hosting model with Cloudways’ managed services approach, allowing it to serve a broader customer base and better position it to capture its more than $72 billion market opportunity — which projects to grow to $145 billion by 2025.

CEO Yancey Sproul is focused on growing the company responsibly and describes himself as “concerned about free cash flow.”

Digital Ocean has set a goal of growing sales by 30% annually while producing high free cash flow margins. With its smart performance, I think the company is well positioned to hit those targets.

DigitalOcean’s shares are down more than 70% from an all-time high posted a year ago, and its current price-to-sales ratio of around 5.7 provides an attractive entry point for long-term investors.

MongoDB: The future looks promising

Almost every company today is a technology and software company in some form, and at the heart of every functional software application is a database like MongoDB. It is the glue that holds different software systems together and plays a key role in fulfilling business services.

MongoDB’s design is based on a relatively new paradigm: the NoSQL database. This allows more flexibility for developers, enables faster development and lowers overall development costs.

MongoDB is cloud agnostic — customers can deploy it on any major cloud platform. The design allows customers to quickly scale their operations without compromising performance. The company also offers a cloud-based full-service offering with its Atlas product, allowing customers to rely on MongoDB for their database needs.

MongoDB isn’t the only game in town for NoSQL databases, but it’s the top choice for businesses, and the company’s fiscal 2023 third-quarter results, reported a week ago, underscored that one more time.

In the year In the quarter ended Oct. 31, MongoDB added 2,100 net new customers, bringing its total to 39,100. The number of clients responsible for more than $100,000 in annual recurring revenue increased to 1,545 from 1,201 a year ago. Total revenue rose 47 percent to $333.6 million, and revenue from Atlas grew 61 percent. Atlas is now responsible for 63% of its total revenue.

The company continues to invest heavily to gain market share and is not profitable. But the net loss margin improved notably from 35.8% a year ago to 25.4% in the most recently reported quarter.

Macro headwinds may result in slower growth for the company and more volatility in the stock price over the next few months, but it’s clear that MongoDB provides an important service, is a top choice in the NoSQL DB market, and is performing well. Shares are down 64% from their all-time high a year ago, and are trading at an all-time low on a price-to-sales ratio of around 11.6.

With a market cap of $84 billion, MongoDB has a long runway ahead of it. Holding a small position in MongoDB will keep investors happy in the long run.