Many companies debuted on the stock market at a time of heightened valuations and are now trading below their initial public offering (IPO) price despite delivering the performance promised. Two stocks currently below their IPO price are Snowflake (SNOW -0.26%) and PubMatic (PUBM -0.14%).
Compared to a first trade price of $245 for Snowflake and $25 for PubMatic, these stocks have fallen 13% and 5.4%, respectively. Both debuted in the second half of 2020 and saw phenomenal stock price appreciation during 2021. However, with the recent sell-off, each is far from its all-time high. Still, I think right now could be a fantastic buying opportunity for both stocks.
Image source: Getty Images.
1. Snowflake
Snowflake offers cloud-based data storage to companies on a pay-as-you-use basis. The Snowflake platform allows customers to use multiple cloud providers so they aren't locked into absurd price hikes by a single source. From there, data engineers can create a pipeline to feed different programs, rather than process data manually. Data scientists can harness this information to drive insights in programs like Alteryx and Salesforce.
We can see that Snowflake's model is working by looking at net revenue retention, which measures how much customers are spending over time. In fiscal year (FY) 2022 (ending Jan. 31), Snowflake's net revenue retention rate was an astounding 178%, or $1.78 for every $1 spent last year. In addition to strong revenue retention, Snowflake brought on 1,805 new customers in FY 2022 for a 44% year-over-year growth rate.
Snowflake has also increased its profitability, growing non-GAAP (generally accepted accounting principles) gross margins over the past three years -- reaching 74% in FY 2022 after 63% in FY 2020. This improvement helped increase its free cash flow margin, up to 12% in FY 2022 after having sunk to negative 12% the year before. With Snowflake retaining more money from each sale (gross margin) and becoming more efficient with its overhead expenses (free cash flow margin), the business is showing its true potential.
Snowflake is projected to grow sales at a 66% pace next year, yet the stock has struggled because of its extreme valuation. At its peak valuation in 2021, the stock traded for more than 100 times sales. This level is rarely reached and never maintained by stocks, regardless of how big the future business opportunity is. Now, Snowflake trades for 56 times sales -- still expensive but much more palatable. However, with annual revenue of $1.2 billion in a market the company expects to reach $90 billion, Snowflake has a long way to go before saturating the market. Investors must understand that Snowflake's valuation is a large risk; even if the company does well, buying the stock at the wrong valuation could wipe out potential gains.
2. PubMatic
A digital advertisement play, PubMatic helps publishers of website, video, and app content sell ad space. Although it has some exposure to the demand side, where ad space is purchased, PubMatic's primary focus is on supply and getting available advertising space on mobile and connected TV platforms to buyers.
Companies are expected to spend $514 billion on digital ads in 2022, up about 17% from 2021 , meaning PubMatic has a massive addressable market and a glaring opportunity to carve out a business niche. Currently, PubMatic estimates it has captured around 3% to 4% of the market share. It aims to capture at least 20% by expanding customer spending and reach within lucrative markets like connected TV and online video. Digital ad spend expansion is just beginning, so PubMatic's ambitious market share goal won't be reached for some time.
Unlike Snowflake and other high-flying tech companies, PubMatic is profitable. PubMatic's GAAP (yes, GAAP!) net income margin was 25% for the full year and its adjusted EBITDA margin was 42%. Improvement in both these numbers over the previous two years is significant. Increased profitability gives a company more financial resources to spend and expand its product suite, feeding management ammunition to achieve its market share goal. It also allows a business to weather difficult time periods without needing to take on debt or go to the public markets for additional funding to survive.
| Fiscal Year | GAAP Net Income Margin | Adjusted EBITDA Margin |
|---|---|---|
| 2019 | 6% | 20% |
| 2020 | 18% | 34% |
| 2021 | 25% | 42% |
Data source: PubMatic.
While not growing at the blistering speed of Snowflake, PubMatic still grew revenue 53% year over year to $227 million. A large chunk of this revenue growth can be attributed to connected TV ad sales, which increased more than six times 2020 revenue in that area. PubMatic's net dollar retention rate isn't as good as Snowflake's, but it is still an impressive 149%. In 2022, management guided for 25% sales growth at the midpoint.
PubMatic's valuation is even more attractive than its growth. From a price-to-earnings standpoint, PubMatic is dirt cheap. At 25 times earnings -- valued less than Microsoft or Coca-Cola -- you can own a profitable and quickly growing tech stock with a huge market in front of it. This is a no-brainer purchase, and investors should be pouncing on this beaten-down stock.
The market is ripe with fantastic growth stocks on sale -- even those growing their top and bottom lines quickly. Investors with a long-term horizon should consider picking these two stocks up at a significant discount.
