The uncertainty around the economy and the likelihood of additional interest rate hikes continue to spook the stock market. While many are fearful and staying away from stocks, savvy long-term investors are getting cheerful looking at some of the once-in-a-lifetime discounts the market has on offer. Two high-quality businesses that are at the top of their holiday shopping lists are CrowdStrike (CRWD 2.85%) and Snowflake (SNOW 2.75%).
1. CrowdStrike is a leader in cybersecurity
Growing digitization is creating all sorts of conveniences in life, but it is also leading to a larger surface area for hackers to attack, steal, and bring business operations to their knees. Needless to say, cybersecurity is a top priority for modern enterprises. According to an Accenture study, IT security budgets jumped to 15% of total IT budgets in 2021 -- representing a growth of 5 percentage points over 2020.
CrowdStrike's cloud-based Falcon platform helps identify cyber attacks and develops strategies to defend against them. Its industry-leading end-point protection service secures a company's mobile devices, laptops, cloud environments, and servers worldwide, and its expanding portfolio of products has made it a go-to choice over the past few years.
The numbers speak for themselves: Over the four-year period of fiscal 2018 (ending Jan. 30, 2018) to fiscal 2022 (ending Jan. 30, 2022), the company grew its customers over 10 times -- from 1,242 to 16,325 -- and its revenue at a similar rate from $119 million to $1.45 billion. And that upward trajectory has continued in the current year.
Image source: Getty Images.
CrowdStrike's fiscal third quarter of 2023 results, announced about a week ago, were solid but failed to please analysts. CrowdStrike's total revenue for the quarter increased 53% year over year, reaching $581 million. Annual recurring revenue, a key metric indicating the stability of cash inflows, grew 54%, reaching $2.34 billion. Over 60% of customers used more than five CrowdStrike products during the quarter, and the dollar-based net retention rate -- the measure of how much existing clients spent over the previous year -- was over 120%.
CrowdStrike achieved that growth while producing $174 million in free cash flow, at about 30% free-cash-flow margin. All numbers looked strong, but analysts honed in on CrowdStrike's "net new" annual recurring revenue for the quarter, which came in at $198 million, lower than $218 million in the previous quarter. The market took this as an indicator that the company's growth is slowing, and the stock sold off, dropping about 20% the next day.
With all the macro headwinds, business budgets are getting tighter and expenses need more approvals. CrowdStrike's sales cycles in the recent quarter were longer than usual and that impacted the "net new" recurring revenue. The company mentioned that it expects most of that uncaptured revenue is delayed rather than lost. No company is entirely insulated from a slowing economy, and the market's focus on short-term results has CrowdStrike currently trading close to its lowest price-to-sales valuation. That is a wonderful gift for long-term investors.
2. Snowflake offers a best-in-class data platform
Snowflake's data cloud allows enterprises to create a one-stop-shop platform to store data in a central repository, assemble it logically, and make it accessible securely. With Snowflake, organizations can move away from anecdotal observations to a data- and analytics-driven approach to make mission-critical business decisions.
Similar to CrowdStrike, Snowflake has been resilient to the economic headwinds. In its recently reported third quarter of fiscal 2023 (ending Oct. 31, 2022), Snowflake's revenue grew 67% over a year ago and its remaining performance obligations -- the total value of signed contracts yet to be delivered -- jumped 66%, reaching $3 billion. The number of customers that spent over $1 million in the past 12 months reached 287, and the dollar-based net retention rate came in at 165%.
Snowflake is not profitable, but the company is headed in the right direction -- its gross margin has improved from 47% in fiscal 2019 (ending Jan. 30, 2019) to 62% in fiscal 2022 (ending Jan. 30, 2022). Operating losses for the same period have lowered from -192% to -59%. And both metrics improved further in fiscal 2023.
Convenience and flexibility have been core to Snowflake's platform design. It works with all the major clouds, easily integrates with hundreds of commonly used technology tools, and allows customers to manage their spend on the platform with its usage-based pricing model. With total customer count clocking at 7,292 at the end of the recent quarter, the platform is clearly resonating with businesses.
Snowflake has smartly expanded the scope of its platform beyond the primary use cases of data analysis and business intelligence. Customers also use its data cloud for artificial intelligence, machine learning, and cybersecurity analytics. In another application, Snowflake's marketplace, where customers can sell information-based products, had 1,700 listings at the end of the third quarter, up 11% over the previous quarter.
The platform also enables customers to share data with each other through connectors referred to as "stable edges." Twenty-two percent of all customers at the end of the recent quarter had at least one stable edge, up 17% from a year ago. Collectively, with all possible uses of its platform, Snowflake projects its total market opportunity in the ballpark of $248 billion. The company has a massive runway in front of it.
Dropping 60% in the past 12 months, Snowflake's shares are trading close to their lowest price-to-sales valuation of around 23. Shares are not cheap by traditional measures, but with its strong market position, excellent execution, and expanding market opportunity, Snowflake is poised to produce great returns. Taking a small position in Snowflake's shares now and adding incrementally over time will likely make investors very happy in the long run.
