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2 Stocks I Want to Buy in the Tech Stock Crash

By Jason Hawthorne - May 18, 2021 at 6:41AM

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Metrics show they are both executing a strategy that could deliver huge long-term gains.

Although the Nasdaq Composite (NASDAQINDEX:^IXIC) is only 5% off its all-time high, some of the technology stocks that make up the index have seen dramatic sell-offs. Companies that have seen the most appreciation in stock price over the past year have experienced the sharpest declines. A big reason may be the decline in U.S. COVID cases, which have dropped 33% in the past two weeks. Another culprit could be the rise in interest rates, which have crept up 25% in the past three months.

Two growth stocks that have gone from favorites to the doghouse are DocuSign (DOCU 4.42%) and Snowflake (SNOW 3.91%). Despite the recent stock performance, both businesses are still putting up impressive numbers. Each has tailwinds that make a tech stock crash a great time to pick up shares for long-term investors.

A man in the background with his hands on his head and a computer screen in the foreground showing a stock selloff.

Image source: Getty Images.

1. DocuSign

Oddly enough, the company's name can be somewhat misleading about its true potential. Yes, DocuSign has the world's No. 1 e-signature solution. However, that's only one piece of a much larger and more lucrative problem the company is solving. The agreement process, from preparing documents all the way to signing and acting on them, is a workflow that has all the characteristics of an analog world. Slow paper trails, expensive manual steps, errors, and disconnected systems create friction in a process that should be effortless in a digital world. The company's agreement cloud aims to solve this dilemma.

Management believes the opportunity for its suite of applications is $50 billion. That means tremendous growth ahead from the $1.5 billion in revenue it posted in the fiscal year that ended in January. To take advantage, the company will need customers to leverage its more than 12 applications and 350 integrations. The numbers show that's happening.

DocuSign not only grew revenue 49% in its most recent fiscal year, but it also grew billing 56%. Those billings -- subscription renewals, sales to new customers, and additional sales to existing customers -- are the best indicator of how fast the business is actually growing. A measure of the sustainability of that growth is the company's Net Promoter Score. It's a metric showing customer loyalty, and DocuSign's score of 71 is on par with Costco, Apple, and Ritz-Carlton. That means customers are thrilled with its products and plan to keep spending on them and recommending them to others.

To top it off, the company is cash flow positive. That means it has cash left over after operating the business and investing for growth. For fiscal 2021, it amounted to $1.01 per share, nearly 250% more than the previous year. Whatever reason commentators offer for the 31% drop from its high, Docusign has all the traits of a company that could grow to several times its current $35 billion market capitalization. Any sell-off should disappear on a long-term stock chart if the company keeps up its current pace.

2. Snowflake

Snowflake came public late last year with a lot of fanfare. The company's CEO brought ServiceNow public -- a stock that has returned 1,750% since -- and the growth metrics seem out of this world. Yet the recent tech sell-off has the stock down 45% from its all-time high. It's easy to argue that the stock was overvalued, trading at more than 140 times revenue at one point, but a tech crash could give investors a rare opportunity. Companies in prime position to dominate an industry don't often sell at a reasonable price. 

Snowflake offers what it calls the data cloud. It's a platform where the company's data providers, partners, and customers can break down silos and develop a single source of truth for business insights and application development. Like other platforms, its power grows with every additional user. Since the stakeholders can share data, the platform gets more valuable for all users every time more data is migrated to it. 

The value proposition is clearly resonating. For the fiscal year ending in January, the company grew revenue 124% and remaining performance obligations (RPO) 213%. Since Snowflake is not a software-as-a-service provider, RPO represents firm commitments instead of time-bound subscriptions. It's still an impressive indicator of a rapidly expanding business. Two more indicators, total customers and customers with more than $1 million in annual revenue, grew 73% and 88% last year, respectively.

The stock may be down and a tech crash could push it further, but Snowflake has proven leadership and a platform that's quickly becoming a competitive advantage for its customers. As the offering provides better data and a more accurate picture of what's happening with products and customers -- and the recent growth numbers suggest that it is -- prospective clients will find it hard to avoid signing up also. That only strengthens the data cloud and weaves it tighter into the fabric of the corporate information technology landscape. For long-term investors, that should produce market-beating returns for any shares purchased during a further tech crash.

Jason Hawthorne owns shares of DocuSign and Snowflake Inc. The Motley Fool owns shares of and recommends Apple, Costco Wholesale, DocuSign, ServiceNow, Inc., and Snowflake. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Snowflake Inc. Stock Quote
Snowflake Inc.
SNOW
$172.01 (3.91%) $6.48
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$541.32 (0.12%) $0.65
Apple Inc. Stock Quote
Apple Inc.
AAPL
$165.10 (-0.15%) $0.24
ServiceNow Stock Quote
ServiceNow
NOW
$498.16 (0.67%) $3.31
DocuSign Stock Quote
DocuSign
DOCU
$75.54 (4.42%) $3.20

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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