Amid a brutal bear market in tech stocks, looking for "supercharged" stocks became more difficult. Many formerly high-growth stocks have slowed down considerably as consumers use electronic devices and the internet less with the end of lockdowns.
However, some companies with highly recession-resistant businesses have maintained their rapid revenue increases. Since these growth tech stocks sell at a significant discount to their pandemic highs, it points to potentially lucrative opportunities in Snowflake (SNOW 0.39%) and Zscaler (ZS -1.59%).
Snowflake
Cloud services have saved organizations billions. This benefit has also held its appeal in the data cloud, the segment increasingly dominated by Snowflake.
Snowflake's data-cloud software connects, unifies, and secures data from one central location. It controls how data is distributed and changed, an arrangement that helps maintain the security and accuracy of data.
Indeed, all major providers offer data clouds of their own. Nonetheless, Snowflake is a cloud-agnostic product. This ability to work with various cloud platforms means it can operate regardless of which companies provide the cloud services. It is an added advantage to companies that must deal with numerous clouds. Such an edge helped attract investment from Warren Buffett's Berkshire Hathaway, and its growth may be one reason Buffett continues to hold.
Indeed, its $920 million in revenue for the first half of fiscal 2023 rose 84% compared with the same timeframe in 2022. That is only a modest slowdown from the 106% year-over-year growth in fiscal 2022.
Still, for the first two quarters of 2023 (which ended July 31), the net loss of $389 million fell only modestly from the $393 million loss in the first half of 2022. A doubling of the cost of goods sold hampered Snowflake's ability to reduce losses significantly.
Also, Snowflake stock is down more than 55% from its high, but that drop may have been a product of its lofty valuation. It trades at a 33 price-to-sales (P/S) ratio, much higher than other data cloud competitors such as Amazon or Microsoft.
Nonetheless, recession fears are not significantly slowing its growth. That makes it increasingly likely that Snowflake will shoot higher once the market begins to recover.
Zscaler
Like Snowflake, Zscaler benefits from operating in a recession-resistant part of the cloud business. It plays an essential role in the cloud, providing security to cloud-connected devices. Since the cloud increased the number of devices and made them more mobile, these devices increasingly need the zero-trust security Zscaler provides.
Zero trust assumes that every user is a potential attacker. It uses AI-based algorithms to discern access privileges based on factors like roles, devices, and locations. And because it operates on the edge through numerous data centers worldwide, its platform dramatically reduces lag times.
In fiscal 2022 (which ended July 31), it brought in nearly $1.1 billion in revenue, 62% more than in fiscal 2021. This made it one of the few companies to benefit from faster revenue growth than during the pandemic. In comparison, revenue surged 57% higher in fiscal 2021.
However, since costs and expenses kept pace with revenue, its fiscal 2022 loss came in at $390 million, a 49% increase year over year.
Also, like other rapidly growing tech stocks, Zscaler stock dropped dramatically over the last year. It now sells at about a 55% discount compared to its high in late 2021. Nonetheless, investors also continue to pay a premium for Zscaler. Its P/S ratio of 22 closely approximates Cloudflare's valuation ratio but is well above the 9.1 P/S of Palo Alto Networks.
However, Zscaler's product is an essential part of cloud transformation, and adoption of it should only rise. This should keep the future of this explosive growth stock bright for a long time to come.
