The bears have a firm grip on the technology sector in 2022, and that grip tightened this week when the U.S. Federal Reserve adopted an interest rate policy that was more aggressive than expected. The Nasdaq-100 index, which is the main barometer for the tech industry's performance, has declined by more than 29% in 2022 so far.
But in some cases, that presents investors with an opportunity to buy a stake in innovative companies at a discount. Steep declines in value haven't stopped Wall Street from recommending Snowflake (SNOW +0.30%), Semrush Holdings (SEMR +0.25%), or Twilio (TWLO +2.08%), so here's why now might be a great chance to take long-term positions in each of them.
NYSE: SNOW
Key Data Points
The cloud stock backed by Buffett's Berkshire
Anthony Di Pizio (Snowflake): Snowflake is an innovative cloud company that has attracted partnerships with trillion-dollar tech giants like Amazon, Microsoft, and Google parent company Alphabet. But it has also won the endorsement of investment company Berkshire Hathaway, which is headed by legendary long-term investor Warren Buffett. The firm's stake in Snowflake is worth about $1.1 billion as of this writing.
There probably isn't a better list of names a company could be associated with, so what's all the fuss about? Well, it starts with Snowflake's Data Cloud. As companies continue to migrate their business operations online using cloud computing technology, they often find themselves using multiple providers to fulfill all of their needs -- such as the aforementioned tech giants. This creates challenges because extracting maximum value from data often requires clear visibility over the whole picture; it's much harder to draw insights from fragmented information stored across several different locations.
Snowflake's Data Cloud helps aggregate this information, and it's the main feature attracting providers to Snowflake. Customers appreciate the ability to exchange data with affiliates even if they're using a different cloud platform, which is what Snowflake's Data Cloud enables. But additionally, being inside Snowflake's ecosystem gives customers access to a marketplace where they can further monetize their data or access more from other sources.
While the rest of the U.S. economy is slowing down, Snowflake's growth is soaring. The portion of its customer base spending $1 million or more annually with the company doubled year over year to 246 in the recent second quarter of fiscal 2023 (ended July 31). It helped push Snowflake's revenue to an 83% growth rate, reaching $497 million for the quarter and, in a clear sign of confidence, the company has added almost 1,000 new employees this fiscal year while much of the tech sector is slashing its workforce.
Snowflake stock is currently down 56% from its all-time high, and Berkshire Hathaway isn't the only bullish firm. Wall Street investment bank Morgan Stanley is betting the stock could soar 53% from here to $274. That would be a big return in this difficult environment.
NYSE: SEMR
Key Data Points
This unknown growth stock has tremendous upside potential
Jamie Louko (Semrush): Most investors might not be familiar with Semrush, but they should be. According to Needham analyst Scott Berg, this unknown growth stock has almost 80% upside potential from its current prices.
Semrush specializes in marketing technology tools, helping businesses reach their target audience through marketing. This is not an advertising stock, however. Semrush provides tools for product marketing streams like social media marketing, search engine optimization, and content marketing. It is the top dog in this space, according to G2, with 91,000 paying customers.
With over 50 tools spanning dozens of marketing categories, Semrush provides nearly everything a marketing team may need. Conversely, its rivals tend to specialize in just one or two categories. This gives Semrush the advantage of being one of the only companies that provides an all-encompassing suite at scale. It also makes it incredibly hard for customers to leave Semrush once they integrate into the system.
This proved to be true in Q2, when the company saw continued growth, despite uneasy macroeconomic factors. Revenue jumped 39% year over year to $63 million in Q2 and the company saw rapid adoption among large customers. Those spending over $10,000 annually increased 80% versus the year-ago period in Q2. This signals how robust the demand for Semrush and its tools is, even during a precarious economic time.
To maintain this lead, Semrush has invested in itself, specifically its people. The company has been spending heavily to move its Russian employees, who made up over 60% of its total workforce, out of the country permanently. Semrush has done so successfully: Nearly all its employees are now out of the country. Having its employees out of that environment means it now has talent in politically stable countries, potentially allowing them to work more efficiently and innovate. However, this hit profitability: Semrush expects its non-GAAP (adjusted) net loss to reach $30 million for the full year, much worse than its $500,000 non-GAAP loss in 2021.
Semrush is seeing the fruits of its labor with steady growth during the precarious time. With its investments in the future, high adoption rates, and a sticky leadership position, the company has a bright future ahead. Additionally, with the stock down 47% year to date, now seems like a good time to grab a slice of Semrush.
NYSE: TWLO
Key Data Points
A leader in cloud communications
Trevor Jennewine (Twilio): Twilio stock has fallen 83% from its high, and shares currently trade at 3.8 times sales, a big discount to the five-year average of 16.2 times sales. To that end, 71% of the Wall Street analysts that follow Twilio recommend buying the stock right now, according to The Wall Street Journal.
Twilio's mission is to fuel the future of communications. Its cloud platform includes a suite of application programming interfaces, or APIs (i.e., code that enables different applications to interact). Those APIs allow developers to easily build software with features like text, voice, and video. Twilio also provides a number of prebuilt software products, including a contact center platform (Twilio Flex) and a customer data platform (Twilio segment). Collectively, those tools help brands engage consumers with personalized communications across virtually any digital channel.
Twilio has parlayed its first-mover status into market leadership. Last year, IDC once again recognized it as the top cloud-communications-platform-as-a-service (CPaaS) provider. The report specifically noted its "broad portfolio, reliability, and reputation for quality" as key strengths. Twilio also received similar recognition in a recent G2 Grid report, which indicated it has achieved a greater market presence than any of its peers.
Not surprisingly, Twilio is growing at a steady clip. Its customer count increased 15% to 275,000 over the past year, and the average customer spent 23% more. In turn, revenue soared 51% to $3.4 billion. On a less optimistic note, the company burned $254 million in cash in the last 12 months, but management says it will achieve non-GAAP operating profitability in 2023.
Twilio still has a long runway for growth. Management values its market opportunity at $87 billion in 2023, and the company should benefit as more businesses look to improve customer engagement through personalized communications. To that end, now looks like a good time to buy a few shares of this growth stock, especially in light of its discounted valuation.
