Depending on your investing style, market pull-backs can be scary or exciting. I view them as a little bit of both. They are exciting because they allow me to purchase shares of my best investments on sale. But it's also OK to have fears during a downturn, as no one likes to see losses in a portfolio. Regardless, all investors must know their capacity for risk and how they react when tough times come (because downturns always eventually occur).
High-growth stocks are usually higher valued than more established businesses. Their prices also tend to be more volatile from day to day. When these valuations take a steep dive in bad times, they present long-term investors with some fantastic buying opportunities. Should an extreme event happen that indirectly affects these companies and causes a price pull-back, three stocks I'd buy are CrowdStrike (CRWD 1.25%), Snowflake (SNOW 2.13%), and Veeva Systems (VEEV 0.11%). These companies have lots of high growth potential and provide a vital product to their customers.
CrowdStrike is in the cybersecurity business, and its demand has never been higher. Its Falcon platform protects endpoints -- like computers or mobile devices -- from being used to access a network maliciously. It does this through a single, cloud-based agent, which keeps the hardware resource drag low while maintaining all functionality. The software has been an enormous success, with 15 of the top 20 banks and 254 Fortune 500 companies enrolled in CrowdStrike's ecosystem. Overall, CrowdStrike believes it has captured 14.2% of its addressable market.
With more than $1.7 billion in annual recurring revenue (ARR), CrowdStrike won't have to worry about constantly making new sales to survive. It also sports a 30% free cash flow margin, meaning 30% of all revenue CrowdStrike brings in is converted to cash on the balance sheet. With solid recurring revenue and healthy margins, CrowdStrike won't need to sell more shares or go to the bank and get a loan to survive a difficult period. This stability is what investors must look for when searching for stocks that can survive downturns.
Barring any massive economic downturn, CrowdStrike believes it can achieve $5 billion in ARR by fiscal 2025 (ending Jan. 31, 2025). This is an ambitious goal, but CrowdStrike has proved it can execute at a high level for many years.
Cybersecurity is a necessity in good times and bad. However, businesses are unlikely to cut their CrowdStrike subscription because rolling out a new cybersecurity solution is both costly and time-consuming -- two items companies have little of during an economic downturn.
Companies generate valuable data but often have nowhere to store or process it. Snowflake solves this problem by allowing storage of structured, semi-structured, or unstructured data across the major cloud providers. It also gives data scientists tools to interpret information used to feed models and affect how a business is run. It operates off a pay-as-you-go model, so companies only pay for the computational power and storage as it is used.
A pricing platform like this can cut both ways, as tough times may cause customers to curtail their usage. However, the data Snowflake processes is invaluable to day-to-day business operations for many companies. With a Dresner customer satisfaction score of 100%, it is pleasing its users with the power of its platform.
Snowflake is rapidly growing and increased its annual revenue by 106% throughout fiscal 2022 (which ended Jan. 31). Existing customers using the platform more drove this increase, captured by its net revenue retention rate. This metric was 178% for the fourth quarter, meaning customers spent $1.78 in the last 12 months for every $1 they spent in the previous year's period.
Cloud architecture platforms are not something easily replicated, so customers must use Snowflake or build a solution themselves. Switching away from Snowflake or creating a new solution will be difficult during a recession, so Snowflake is well-positioned to handle a market downturn.
3. Veeva Systems
Documentation becomes extremely important when operating in the life sciences field, as government regulations are strict on what is approved for human use. Through Veeva System's cloud ecosystem, companies can maintain regulatory compliance while still bringing products to market quickly. Its solutions have captured many of the top players in the market, with 16 of the top 20 pharmaceutical companies utilizing Veeva Vault eTMF.
Veeva Systems has been a consistent and robust grower, with its annual revenue growth rate exceeding 25% for each of the last four years, including 26% growth in its previous fiscal year. Because subscription revenue makes up 80% of total revenue, Veeva is not dependent on acquiring new customers to survive. With 17% revenue growth projected in fiscal 2023 (ending Jan. 31, 2023), Veeva is still slated for solid growth.
Getting rid of Veeva Systems' products during a downturn would be a disaster, as companies would have to revert to tracking information the old way: paper. While new customers may be hesitant to sign on in a rough patch, the existing businesses will allow Veeva to stay steady when many other companies may be sinking.
When is the best time to buy these stocks?
All three of these companies have been high valuation growth stocks, meaning some of their potential growth has already been priced into the stock. Finding companies with recurring revenue is critical as customers must continue paying the providers to utilize their services, and investors recognize that and it has helped keep their valuations high.
But if these companies are trading down because of macroeconomic factors unrelated to their performance, they would definitely be on my buy list.
Coincidentally, CrowdStrike, Snowflake, and Veeva Systems are all getting hit by macroeconomic factors right now. CrowdStrike's stock price is down about 24% from 52-week highs set in November 2021, Snowflake is down 52%, and Veeva Systems is down nearly 44%. That makes these three stocks excellent buys during a downturn and solid buys at any other time.