This has been a record-breaking year on Wall Street, with the benchmark S&P 500 tumbling to its fastest-ever decline of more than 30%, as well as rebounding to new highs from a bear market bottom quicker than ever before. We've also witnessed the highest CBOE Volatility Index reading in history, along with a brief period of negative futures prices for West Texas Intermediate.
But 2020's records aren't done being broken just yet.
This Snowflake is red-hot
This past Wednesday, Sept. 16, cloud data giant Snowflake (SNOW -4.71%) made its debut.
Snowflake was widely believed to be the most-anticipated initial public offering (IPO) of the year, if not of the past couple of years. Early indications had the company pricing its IPO at a range of $75 to $80 a share, but Snowflake officially set its list price at $120. Even this 50% increase discounted the insane investor demand for this stock. When the closing bell rang on the company's first day of trading, Snowflake's shares had risen nearly $134, or 112%, from its IPO price to close at just shy of $254. For you math-phobic people, this works out to a market cap of more than $70 billion. That makes Snowflake the largest software IPO of all time.
Why such insane demand? For one, Snowflake had salesforce.com and Warren Buffett-led Berkshire Hathaway (BRK.A -0.95%) (BRK.B -0.91%) invest $250 million each via private placement. Berkshire Hathaway will also acquire more than 4 million shares through a secondary offering. To be crystal clear, I'm all but convinced that investing maven Buffett isn't behind this investment and doesn't have a clue what Snowflake does. Rather, Berkshire Hathaway's investment has everything to do with Buffett's investing lieutenants, Todd Combs and Ted Weschler. Of course, this still hasn't stopped folks from forcibly connecting the dots that "Buffett's company bought into Snowflake."
Snowflake is also what we'd call a hypergrowth company. Sequential quarterly growth has averaged 24.3% over the past eight quarters, and the company has more than doubled the number of customers spending at least $1 million annually from the prior-year quarter (56 vs. 22). Further, its net retention rate of 158% backs up the idea that retained clients are spending more (i.e., storing and sharing more data).
But at more than 130 times annual recurring revenue (ARR), Snowflake is obscenely pricey. In fact, the company's valuation briefly surpassed its total addressable market ($81 billion) on an intraday basis. If given the choice, I'd say forget about Snowflake and buy these hypergrowth stocks instead.
If I wanted supercharged growth, I'd much rather buy telemedicine kingpin Teladoc Health (TDOC -1.80%). After all, Teladoc has grown its full-year revenue from $20 million in 2013 to what looks to be roughly $1 billion for 2020. That's a compound annual growth rate (CAGR) of almost 75%. For what it's worth, Wall Street foresees the company's annual sales nearing $2.6 billion by 2024.
You might be thinking, "Hey, isn't this growth entirely the result of the coronavirus pandemic?" To some extent, the company's push toward $1 billion in annual sales, and the 203% increase in total visits from the prior-year quarter during Q2, are direct responses to the coronavirus disease 2019 (COVID-19). Doctors want to keep COVID-19-infected people and at-risk patients with chronic ailments out of their offices to the extent possible.
But a 75% CAGR also suggests that Teladoc was gaining significant traction well before the pandemic hit. Telemedicine is a win for the entire healthcare chain. It provides convenience for the patient, increases scheduling flexibility for physicians, and lowers costs for insurance companies (relative to in-office visits). These advantages mean we're only going to see telemedicine grow in importance and use over time.
Teladoc is also acquiring applied health signals company Livongo Health (LVGO) in a cash-and-stock deal. Livongo's platform collects copious data on patients with chronic illnesses and uses artificial intelligence to send these folks tips and nudges. The company's goal is to induce lasting behavioral changes in these patients so they live healthier lives.
Livongo's diabetic member count has been at least doubling on a year-over-year basis, with the company reporting three consecutive quarterly profits. A combined Teladoc and Livongo will be virtually unstoppable in the precision medicine space.
If investors are eagerly scooping up cloud data warehousing stock Snowflake at north of 130 times ARR, then cloud-native cybersecurity specialist CrowdStrike Holdings (CRWD -0.25%) is a deeply discounted value stock at 36 times ARR. Yes, I'm being a bit sarcastic. But on a relative valuation basis, and when looking at CrowdStrike's sales and growth potential, I'd much rather buy it than Snowflake at this point.
If hypergrowth is your thing, you'll get it with CrowdStrike. According to the company's fiscal Q2 2021 earnings presentation, full-year subscribing customers have jumped by 176%, 103%, and 116%, respectively, in each of the past three fiscal years, and catapulted by 91% in Q2 2021 from the prior-year quarter. Keep in mind that this 91% subscriber customer growth occurred during the worst quarter for the U.S. economy in decades.
How has CrowdStrike not floundered along with the economy? The simple answer is that cybersecurity has evolved into a basic-need service. Hackers don't take time off just because a small business is struggling. Further, with the COVID-19 pandemic altering the traditional office environment, businesses have shifted toward shared clouds and off-site workspaces. CrowdStrike's AI-driven solutions are thus in high demand.
What makes CrowdStrike a long-term winner is the company's success in getting its existing clients to spend more. The company's Falcon platform is designed to be scaled and grow more intelligent at spotting threats as businesses grow. CrowdStrike notes that, in its recently completed quarter, 57% of its clients had four or more cloud module subscriptions. This figure stood at only 9% in fiscal Q1 2018.
CrowdStrike could reasonably triple its full-year sales over the next two years, making it a veritable bargain next to Snowflake.
Another rapidly growing stock that I'd buy over Snowflake is payment facilitator Square (SQ -2.84%), which has nearly quintupled off of its March 2020 lows. Square isn't cheap by any means, but it has all the tools necessary to be a game-changer in the fintech space.
Square's time-tested business is the company's seller ecosystem, which provides point-of-sale solutions to businesses. Since its launch, the company has focused on small businesses. Gross payment volume (GPV) across its network rose from $6.5 billion in 2012 to $106.2 billion in 2019. That's a healthy CAGR of 49% per year.
But what's interesting is that Square is seeing a growing number of medium and large businesses using its seller platform. A medium/large business is one that generates $125,000 or more in GPV. According to Square's most recent quarterly results, these bigger businesses accounted for 52% of total GPV. That rising proportion points to higher merchant fee collections over time.
Square also has Cash App, which is the considerably faster-growing segment of its operations. In 30 months, the number of monthly Cash App users has skyrocketed from 7 million to 30 million, with 7 million of its current 30 million users also using Cash Card (a debit card that links to a user's Cash App account). Cash App is the perfect way to tackle the war on cash, and gives the company a number of ways to generate revenue (e.g., merchant fees, bitcoin exchange, and expedited transfer fees).
How quickly Square can grow is anyone's guess at this point. Its CAGR over the next four years is estimated at almost 53%, and the company has a track record of blowing Wall Street's consensus estimate out of the water. It's a company I'd buy in a heartbeat before touching Snowflake.