It doesn't matter if you're a seasoned investor or barely beginning: This has been an exceptionally tough year. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite have all suffered their worst first nine months of a calendar year in 20 years. With apologies to Thomas Paine, "These are the times that try investor's souls."
Yet every cloud has a silver lining, and this one is no different. During bear markets, stocks that can deliver life-changing returns are beaten down just as much as their lukewarm counterparts. Case in point: These three high-growth stocks have all the ingredients needed to produce multibagger returns, yet have fallen between 40% and 54% from their highs reached late last year. Here's a look at each.
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1. CrowdStrike
Even as the economy suffers from the "is-it-or-isn't-it" recession, business leaders have been reluctant to cut back on cybersecurity. All too often, headlines remind them of the folly of those that seek to cut corners, only to become the victim of a hack, intrusion, or breach. Cybersecurity specialist CrowdStrike (CRWD -0.68%) has benefited enormously from this ominous trend, but its stock fallen 40% from its recent highs.
Yet this decline belies the surging growth in the company's core endpoint security business. In its fiscal 2023 second quarter (ended July 31), CrowdStrike's revenue climbed 58% year over year, while subscription revenue rose even more quickly, up 60%. This helped annual recurring revenue (ARR) jump 59%, which highlights the company's growing future potential. While it isn't yet profitable, CrowdStrike boasts strong cash flow from operations and free cash flow, which shows that profits are simply a matter of time.
Equally important is the company's quickly expanding total addressable market (TAM), which management expects to top $126 billion by 2025. Viewed in the context of its full-year fiscal 2022 revenue of $1.45 billion helps illustrate the vast opportunity ahead.
2. Datadog
As more businesses join the digital transformation, they rely on web traffic, data centers, and cloud computing to stay connected with their customers. Unfortunately, downtime can result in customer losses, lower revenue, and a damaged reputation. Datadog (DDOG 0.50%) solves those issues with its state-of-the-art monitoring and analytics platform, but the stock has lost some of its luster, down 52% from its peak.
Yet a look under the hood shows a business that is firing on all cylinders, even as the stock price suffers. In the second quarter, Datadog generated revenue that grew 83% year over year, surging from just 51% gains in the prior-year quarter. The company also isn't profitable, but consistent free cash flow provides the outline for the strong profits to come.
Furthermore, Datadog has a large, growing opportunity that shouldn't be underestimated. The company generated revenue of just over $1 billion last year, which pales in comparison to its TAM, which management estimates at roughly $53 billion by 2025.
3. Snowflake
Given the current economic climate, and its pay-as-you-go pricing structure, you'd think that data warehouse, storage, and analytics company Snowflake (SNOW 2.53%) would be suffering. After all, the stock has cratered 54% since late last year. But pulling back the curtain reveals that just the opposite is true -- the company's growth is quite robust.
For the fiscal 2023 second quarter (ended July 31), Snowflake's revenue grew 83% year over year while also increasing its gross profit margin. It isn't profitable just yet, but management is guiding for non-GAAP net income for the full fiscal year. Furthermore, Snowflake's strong free cash flow provides investors with assurances that its current losses are the result of noncash charges, including depreciation.
Its future growth should be equally strong, as evidenced by its remaining performance obligation (RPO) -- a leading indicator of a company's future revenues -- which surged 78%.
Finally, Snowflake has a large, growing opportunity. Management puts the company's TAM at $248 billion by 2026, which eclipses its fiscal 2022 revenue of $1.2 billion.
Data by YCharts
Every rose has its thorn
I'd be remiss if I didn't address the elephant in the room: All this growth comes at a cost. Even after the recent stock price declines, CrowdStrike, Datadog, and Snowflake are currently selling for 13 times, 13 times, and 19 times next years' sales, when a reasonable price-to-sales ratio for many types of stocks is between 1 and 2. Furthermore, current macroeconomic conditions could be a source of significant price volatility in the near term, so investing in these stocks isn't for the faint of heart.
That said, given their robust revenue growth, brisk secular tailwinds, large addressable markets, and discounted prices, I'd argue that these stocks are a bargain, even at these somewhat frothy valuations. Buying CrowdStrike, Datadog, and Snowflake now and holding them for decades would be a wise investment indeed.
