Investing in fast-growing companies that are serving a crucial need in the world can be a rewarding strategy to find long-term winners in the stock market.
One secular trend that is certain to lead to some big returns is growth in digital services. Here's why Avid Technology (AVID -0.93%) and Snowflake (SNOW 4.53%) are well-positioned for a prosperous decade ahead.
Avid Technology provides professional content creation tools that are used widely by music artists, filmmakers, and broadcast teams in TV production. Revenue accelerated in the most recent quarter to 20% year over year, but Avid's transition to a subscription-based model could lead to a very lucrative future.
Avid's total number of software subscriptions has more than doubled to 346,000 since third-quarter 2019. Free cash flow has increased right alongside the growth in subscriptions, improving from negative $5.2 million in second-quarter 2020 to positive $5.6 million in Q2 2021.
New offerings and innovation should drive more demand. Avid just released a mobile version of Sibelius, a popular desktop notation application for music composers. It's also seeing growing subscriptions from enterprises, driven by increasing demand for MediaCentral and other software.
Analysts currently expect the company to post adjusted earnings per share of $1.20 this year and $1.49 next year. At a forward price-to-earnings ratio of 25, Avid Technology could be an undervalued mid-cap growth stock.
Snowflake is a relative newcomer in the booming cloud services market. It's taken the data warehouse, where businesses store data for reporting and analyzing metrics and turned it into software-as-a-service. Revenue growth has consistently remained above 100% going back before the pandemic. More enterprises are looking for a simple solution to store data that can be accessed across multiple cloud service providers while also being able to distill insights using artificial intelligence models. Snowflake is checking off those boxes in a big way.
Snowflake is certainly getting stronger with every quarter that it reports massive growth on the top line. As customers use Snowflake's platform, they tend to use it more. Data can be exchanged with other customers, which makes the platform more valuable as more organizations join the platform.
Investors should be aware that Snowflake is a small business with just $851 million in revenue going up against tech heavyweights with deep financial pockets like Amazon Web Services and Microsoft Azure -- the two leading cloud service providers that also offer data warehousing services. So far, Snowflake's data-sharing features and the ability for customers to use it across multiple cloud service platforms has been a winning formula. The company reported an outstanding net revenue retention rate of 169% in the second quarter, an indicator that customers are sticking around and spending more with Snowflake after initially joining the service.
The stock looks very expensive at a price-to-sales ratio of 102, but Snowflake's estimated addressable market of $81 billion spells a long runway of growth ahead that could still lead to more gains over the next decade.