Investors with exposure to SaaS (software-as-a-service) stocks would have experienced a steep decline in portfolio values over the last six months. Prior to the sell-off, several SaaS companies were growing revenue at enviable rates and expanding their bottom-line rapidly, driving share prices higher.

However, the steep multiples of SaaS companies and a challenging macro environment have acted as key catalysts to trigger a broader market sell-off. While it's impossible to time the market, the ongoing volatility allows investors to buy quality stocks at a relative discount. So let's look at two beaten-down SaaS stocks investors should watch out for in 2022.

Datadog

Datadog (NASDAQ: DDOG) provides a cloud-based monitoring and analytics platform for enterprises in North America and other international markets. Shares of Datadog are trading 56% below all-time highs, valuing the company at a market cap of $30 billion.

Datadog reported revenue of $363 million in Q1, an increase of 83% year-over-year. Its customer base widened to 19,800 compared to 15,200 in the year-ago quarter. Further, 2,250 customers generate at least $100,000 in annual recurring revenue (ARR), up from 1,406 in the same period last year. 

These customers also account for 85% of the company's ARR. Its dollar-based net retention rate stood at 130%, suggesting increased customer usage and higher customer adoption of company products.

Datadog remains optimistic about long-term growth as cloud migration and the digital transformation journey of enterprises continue to gain pace. In Q1, around 81% of customers used two or more products compared to 75% last year. Moreover, 35% of customers used four or more products, up from 25% in Q1 of 2021.

Its stellar revenue growth allowed Datadog to report a free cash flow of $130 million, indicating a margin of 36%. Datadog also reported adjusted earnings of $0.24 per share, compared to Wall Street estimates of $0.12 per share.

Datadog is forecast to increase sales by 57.3% to $1.62 billion in 2022, while adjusted earnings might expand by 54% to $0.74 per share. Despite its lower stock price, Datadog is trading at 18x forward sales and 130x forward earnings. Moreover, analysts tracking Datadog expect the stock to rise by 70% in the next 12 months.

MongoDB

Valued at a market cap of $16.3 billion, MongoDB's (NASDAQ: MDB) stock is down 59% from all-time highs. It provides a general-purpose database platform to enterprises globally.

In Q1 of fiscal 2023 (ended in April), MongoDB reported revenue of $285.4 million, an increase of 57% year-over-year. The primary driver of the company's sales was its cloud data platform Atlas, which saw an 82% rise in revenue.

Its subscription sales were $274.6 million, accounting for 96% of total revenue. Its adjusted gross profits rose to $214.3 million, indicating a margin of 75%, compared to 72% in the year-ago period. 

An improvement in gross profits enabled MongoDB to widen its operating and net income by a significant margin. MongoDB ended Q1 with an adjusted operating income of $17.5 compared to a loss of $2.8 million in the prior-year quarter. Its adjusted net income stood at $15.2 million or $0.20 per share compared to a loss of $3.9 million or $0.06 per share in Q1 of fiscal 2022.

MongoDB's operating cash flow stood at $11.6 million, and its free cash flow was $8.4 million in the quarter ended in April. It also ended the quarter with more than $1.8 billion in cash, providing it with enough flexibility to reinvest in growth.

MDB stock is trading at 14x forward earnings and is expected to report an adjusted loss of $0.24 per share in fiscal 2023. Despite its sky-high valuation, Wall Street remains optimistic about MongoDB and expects the stock to increase by 50% in the next 12 months.