As interest rates fall, Snowflake, Datadog, and Upstart should recover.
Many artificial intelligence (AI) stocks have soared in recent years as new generative AI tools sparked a buying frenzy for AI chips, AI servers, and AI-powered cloud services. Some clear winners include: NVIDIA, Super Microcomputerand MicrosoftBut as these top stocks soaked up all the excitement from the tech sector, many other AI-related stocks were left behind.
So, if you're looking to buy some beaten-down AI stocks as a contrarian investment, you should consider buying. Snowflake (snow 0.01%), Datadog (D.D.O.G. 0.18%)and Upstart (UPST -2.18%) Both are still trading well below their all-time highs.
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1. Snowflake
Many large enterprises store data across distributed networks of different computing platforms and applications. These silos can make it difficult to make fast, data-driven decisions. Snowflake breaks down these barriers, aggregating all your data and cleaning it up in a cloud-based data warehouse for other applications.
Its silo-busting approach has made Snowflake a promising choice in the growing data-hungry AI market, but after hitting an all-time high of $401.89 on Nov. 16, 2021, its value has fallen by roughly two-thirds as revenue growth slowed.
Macroeconomic headwinds have forced many companies to rein in cloud spending, and rising interest rates have weighed on valuations, exacerbating that pressure.Snowflake's product revenue, which accounts for the majority of its sales, more than doubled in fiscal 2021 and fiscal 2022 (ending January 2022) and is set to grow another 70% in fiscal 2023.
However, that figure is expected to rise by just 38% in fiscal 2024 and grow by just 24% in fiscal 2025. While the slowdown came as a shock to investors, analysts still expect the company's revenue to grow at a 24% compound annual growth rate (CAGR) from fiscal 2024 to fiscal 2027 as the macro environment stabilizes and the AI market expands. Snowflake is not yet profitable, and the stock isn't cheap at 12 times this year's sales, but it could recover once near-term headwinds subside.
2. Datadog
Datadog's cloud-based platform captures diagnostic data from all of an organization's applications, databases, and servers, then aggregates that real-time information into a unified dashboard for rapid analysis by IT professionals.
The company's shares have fallen nearly 40% since hitting an all-time high of $196.56 on November 9, 2021. Like Snowflake, the company is struggling with slowing software spending amid a challenging macro environment. The company's revenue grew at an impressive 67% compound annual growth rate from 2019 to 2022, but only increased by 27% in 2023. Analysts expect the company's revenue to grow at a more moderate compound annual growth rate of 24% from 2023 to 2026.
While the slowdown was disappointing, the company's dollar-based customer retention rate is also well above 100%, and it's upgrading its dashboard with new generative AI tools (including a chatbot called Bits AI) to make issues easier to spot. And with spending in check, the company is on track to return to generally accepted accounting principles (GAAP) profitability in 2023, with analysts expecting earnings per share (EPS) to grow at a CAGR of 86% from 2023 to 2026.
Datadog's stock isn't cheap at 15 times this year's sales, but the company has carved out a defendable niche and expanded the generative AI ecosystem, and its prospects should brighten as more companies start investing more in infrastructure again.
3. Upstart
Upstart uses its AI-powered platform to help banks, credit unions and car dealerships approve loans. But it doesn't just analyze customers' FICO.® They analyze not only scores, credit history and annual income, but also hundreds of non-traditional data points, such as degrees, GPAs, standardized test scores and past work history, to approve a wider range of loans.
Upstart's revenue grew at a compound annual growth rate of 127% from 2019 to 2021. The company also turned profitable with GAAP EPS of $0.08 in 2020, before increasing EPS to $1.43 in 2021. This explosive growth has helped the company's stock price reach an all-time high of $390 on October 15, 2021.
Unfortunately, Upstart's revenue declined 1% in 2022 and plummeted 39% in 2023. It also fell back into the red as its debt-to-equity ratio increased. The slowdown was primarily due to rising interest rates, which led to a decline in consumer loan take-up. The company's lending partners also reduced the loans they offered on their platforms.
That's why Upstart's shares have fallen more than 90%, to around $31. But after that drop, Upstart looks cheap at six times this year's sales. Analysts expect the company's revenue to grow at a 17% compound annual growth rate from 2023 to 2026 as interest rates eventually decline. So, while the bulls are turning a blind eye, I think now may be a good time to buy this AI-powered fintech stock.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Datadog, Microsoft, Nvidia, Snowflake, and Upstart. The Motley Fool recommends Fair Isaac and recommends buying Microsoft January 2026 $395 calls and selling Microsoft January 2026 $405 calls. The Motley Fool has a disclosure policy.
