2022 has not been a good year for growth equity investors. Rising inflation, which is expected to lead to higher interest rates, has prompted investors to take shelter. Many funds, especially those exposed to growth stocks, suffered losses. These include the SPDR S&P 500 Growth ETF ( SPY -0.99% ) and Cathie Wood ARK Innovation ETF (ARKK -4.96% ), which are down 10% and 20% since the start of the year, respectively. While some investors are running for the hills, others see it as an opportunity to make opportune long-term purchases. The two companies below fit this bill.
Amazon ( AMZN -1.33% ) is really the story of two companies. The e-commerce business is experiencing severe headwinds, while other segments like Amazon Web Services (AWS) are booming. The stock is down more than 6% since the start of the year and more than 4% over the past year.
The e-commerce part of the business has come up against the realities of COVID-19 in recent times. First, the tight labor market in the United States prompted the company to reward its employees with bonuses and salary increases. This is important because the business needs a strong and committed workforce. However, ensuring this has added billions of dollars in costs. Then, supply chain bottlenecks caused the company logistical headaches, which added costs to the bottom line. As a result, the North American and International segments posted lower operating income than in 2020 despite rising sales.
These short-term headwinds may obscure the overwhelmingly positive results the AWS segment has shown and the company’s growing ad revenue. AWS has thrived in today’s market, growing revenue in 2021 to $62.2 billion, a 37% increase over 2020. AWS segment operating profit reached $18.5 billion over a solid operating margin of 30%. Advertising sales have exploded from $19.8 billion in 2020 to $31.2 billion in 2021. This fast-growing revenue stream is expected to boost profits and further diversify the company’s sales, increasing the share value.
Amazon also recently announced Amazon Prime’s first rate increase since 2018. Now that the cost is rising from $119 to $139 per year, Amazon stands to enjoy billions in additional revenue in the coming years. The company reports over 200 million Amazon Prime members. At $20 each, that equates to $4 billion in sales every year. Amazon has a very profitable segment to weather tough times in e-commerce. When the retail headwinds ease and the business is back to full steam ahead, there is a tremendous opportunity for earnings to multiply and stocks to beat the market.
Businesses increasingly depend on digital operations to function. But what happens when incidents arise that need to be dealt with quickly and efficiently? The right teams need to be informed and action taken immediately to keep systems operational – this is where PagerDuty (PD -6.54% ) The company’s platform enables automated incident response assignment and real-time tracking to keep businesses running smoothly. It also offers preventive and predictive digital solutions. These solutions reduce downtime and enable faster troubleshooting.
In one example, DraftKings (DKNG -21.62% ) relies on PagerDuty to notify the right teams and provide visibility and communication to manage incidents, such as website or application outages. Prior to PagerDuty, DraftKings had the necessary team to constantly (and manually) monitor the system for issues, especially during match days. These people were forced to carry laptops around all day. As the company grew, more and more of these teams were needed, and the engineers began to suffer from burnout. Now, PagerDuty’s platform automates the process, alerts the right person, enables data-driven decision-making, and issues are resolved faster. This ultimately improves the DraftKings customer experience, which is essential in its ultra-competitive industry.
PagerDuty was founded by software developers who imagined a better way to manage incident response operations. Their direct knowledge of existing inefficiencies and market needs is a huge advantage. These developers were once on call 24/7 to deal with outages or other cases and were tethered to their pagers. They were literally on “pager service” as they called it. They realized that this system needed to be improved, especially with the increasing complexity of the online infrastructure.
14,486 paying customers were reported by PagerDuty in the third quarter of fiscal 2022. Of these, 543 generated revenue of more than $100,000 per year. This is an increase of more than 35% over the previous year. The company also has thousands of non-paying customers. There is a clear opportunity to monetize these customers as they become dependent on the PagerDuty platform.
PagerDuty estimates a total addressable market (TAM) of $36 billion. This gives the company plenty of room for growth as it has forecast sales of $279 million for fiscal year 2022. PagerDuty is investing heavily in sales and marketing and is not yet profitable by generally accepted accounting principles. (GAAP), and investors should be aware of this risk. . The current market capitalization of $3 billion puts the price-to-sales (P/S) ratio at just over 11, which is lower than what it has traded in recent months, as shown below.
The stock has seen bearish momentum and near-term price action is uncertain. However, this company has the ability to easily reward long-term investors. PagerDuty continues to grow its customer base, and those customers, like DraftKings, rely on the product to keep their business running smoothly. As a result, the product is very sticky. Investment in sales and marketing will help continue to grow this customer base and PagerDuty should benefit from this in the long run.
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