The S&P500 (SNPINDEX: ^GSPC) is up 10.6% year to date, but history says the benchmark index could rise even higher in the coming months. Over the past decade, the S&P 500 has returned an average of 1% in June, 3.1% in July, and 0.3% in August, for a total gain of 4.4% over the summer.
Of course, past performance does not guarantee future returns, so similar results this summer are not certain. But the stock market will undoubtedly rise much higher eventually. The S&P 500 has gained 10.1% annually over the past twenty years, a broad enough period to expect similar results over the long term.
In that context, investors need to be confident that they can bring money to the market on a consistent basis. This is why Data hound (NASDAQ:DDOG) And Roku (NASDAQ: ROKU) are my picks for the best growth stocks to buy in June.
Datadog: A leader in observability software
Datadog reported strong first quarter results, including a sequential acceleration in revenue growth. The number of customers increased by 10% to 28,000, and average expenditure per existing customer increased by more than 10%. In turn, revenue rose 27% to $611 million, and non-GAAP (non-generally accepted accounting principles) net income rose 91% to $0.44 per diluted share.
The bull case for Datadog centers on the growing need for observability software and the breadth of the platform. Cloud computing, artificial intelligence (AI), and other digital transformation projects are making IT environments more complex, creating a need for observability software (also called performance monitoring). Datadog focuses on multiple relevant markets by integrating more than twenty observation and security products on one platform.
This strategy resonates in the current economic climate as many companies pursue supplier consolidation. In other words, they want to replace a patchwork of point products from different vendors with integrated software from a single vendor. By doing this, they hope to improve operational efficiency, simply because maintaining less disparate products is generally less complicated (and cheaper).
Datadog enables supplier consolidation and the company has received praise from industry analysts in several product categories. In particular, Datadog is a leader in application performance monitoring (APM) and artificial intelligence for IT operations, and has a strong presence in both cloud infrastructure monitoring and database monitoring.
Going forward, Wall Street expects Datadog’s revenue to grow 25% annually through 2026, a reasonable estimate given that the APM and cloud monitoring markets are expected to grow 15% and 21% annually through 2030, respectively. In context, Datadog’s current valuation of 17.9 times sales seems reasonable.
As a caveat, I consider Datadog a worthwhile investment at its current valuation, so I selected it as one of my top ideas for June. That doesn’t mean the stock will be worth more in July. Instead, I expect Datadog to beat the S&P 500 over the next three to five years.
Roku: The Most Popular Streaming Platform in the US
Roku reported encouraging results in the first quarter. Revenue rose 19% to $755 million, an acceleration from 11% growth last quarter and 1% growth last year. The company also reported positive non-GAAP earnings before interest, taxes, depreciation, and amortization (EBITDA) of $41 million, compared to a loss of $69 million in the prior year.
The bull case for Roku revolves around its ability to engage consumers. The company operates the most popular streaming platform in the US as measured by viewing time. Moreover, Roku OS is the best-selling smart TV operating system in the US and Mexico. That brand authority should help the company maintain its leadership in streaming, making Roku a major beneficiary as connected TV (CTV) ad spend increases.
To illustrate, US consumers spent 38% of TV viewing time on streaming services in April 2024, but CTV ads will only make up 32% of total TV ads this year. That gap will eventually be closed. According to eMarketer, CTV ad spend is expected to grow 13% annually through 2027, while traditional TV ad spend will decline.
Roku has another tailwind behind its business. The Roku Channel – the ad-supported streaming service – accounted for a record 1.4% of TV viewing time in April. That’s great Big global‘s Paramount+ (1%), Warner Bros. Discovery‘s Max (1.2%), and Comcast‘s Pauw (1.3%). The growing popularity of The Roku Channel could bring more advertising dollars to the platform, helping Roku gain market share.
Going forward, Wall Street expects Roku to grow revenue 12% annually through 2026. The company could certainly beat that estimate if it gains market share in CTV advertising. But even if Wall Street is right, Roku’s current valuation of 2.2 times sales seems quite reasonable, especially when the three-year average is three times sales.
Similar to my caveat on Datadog, I see Roku as a worthwhile investment in June. That doesn’t mean Roku will be worth more in July, but rather that I think it will beat the market over the next three to five years.
Should you invest $1,000 in Datadog now?
Consider the following before purchasing shares in Datadog:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Datadog wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $671,728!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns May 28, 2024
Trevor Jennewine has positions in Roku. The Motley Fool has positions in Datadog, Roku and Warner Bros. Discovery and recommends it. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.
The S&P 500 could rise this summer: My picks for the two best growth stocks to buy in June was originally published by The Motley Fool
