For most growth-focused investors, the last year has been nothing short of brutal. The Nasdaq Composite has plummeted 33% across the stretch and is off 35% from its high. And many companies with growth-dependent valuations have seen even more-staggering pullbacks.
But as Albert Einstein said, "In the middle of difficulty, lies opportunity." While macroeconomic headwinds and concerns about the potential for a prolonged downturn have caused the market to turn its back on growth stocks, there are many promising companies out there that will go on to enjoy sunnier days.
On the heels of big sell-offs, here's why you'll want to build positions in these two great stocks before the next big rally.
Image source: Getty Images.
1. Snowflake
More than ever before, data-driven decision-making is an essential competitive differentiator for companies and institutions. The ability to access and analyze information in real time is also at the heart of most of today's favorite cloud-based applications and services.
Given this importance of being able to draw from a wide range of information, it might come as a surprise to hear that organizations can't natively combine information generated on Amazon's, Microsoft's, and Alphabet's respective cloud-infrastructure services.
With the vast majority of enterprises using multiple cloud setups today, the inability to easily use data from different infrastructure providers poses a huge problem. Snowflake (SNOW +0.29%) offers a solution.
Its Data Cloud service makes it possible combine, analyze, and act on data from walled-off infrastructure providers. In addition to this data-warehousing platform, the company also provides a marketplace platform that allows users to buy, sell, and share access to data.
Snowflake is addressing crucial needs for modern organizations, and it's translating to impressive business performance.
NYSE: SNOW
Key Data Points
The company has been concentrating its customer acquisition efforts on large enterprises and organizations, and it's been finding commendable success getting high-value clients on board. The data-services provider closed out its October-ended third quarter with 543 of the Forbes Global 2000 companies using its products, up from the 462 companies it had at the end of the prior-year period.
Continued acquisition of new large customers has helped Snowflake grow sales at an impressive clip, but that's only part of the picture. Once customers join the company's ecosystem, they tend to significantly ramp up their spending over time.
Last quarter, the company posted a net-revenue-retention rate of 165%, which means that existing customers increased their spending 65% compared to the prior-year period. Spurred by these catalysts, product revenue increased 67% year over year in the third quarter, and the business posted a strong adjusted gross margin of 75%.
With the stock down roughly 67% from its high, Snowflake has the potential to deliver tremendous returns for investors who take a buy-and-hold position at today's prices.
2. Cloudflare
Cloudflare (NET +1.83%) keeps websites and applications online and running smoothly. Through its technologies that protect against distributed denial of service and its other software, the company says it blocks over 126 billion cyberthreats each day.
The company also provides content delivery network (CDN) services that speed up the rate at which information is sent and received around the web.
And analysis from W3techs, which surveys the use of various technologies on the web, estimates that nearly 80% of websites that use CDNs rely on Cloudflare's services.
Like Snowflake, the company is scoring wins with large enterprises and organizations capable of driving strong sales growth. Cloudflare has over 156,000 customers worldwide, but it generates more than half of its revenue from large customers.
The company ended last quarter with 1,908 customers generating at least $100,000 in annual revenue, up 51% year over year, and it posted a net-revenue-retention rate of 124% in the period. Overall revenue grew 47% year over year to come in at $253.9 million, and it recorded an impressive 76% gross margin in the quarter.
NYSE: NET
Key Data Points
Cloudflare estimates that its total addressable market will grow to $135 billion in 2024, up from $115 billion in 2022. With the company having just reached a $1 billion annualized run rate in the third quarter, it still has a massive market opportunity ahead of it.
Customers have a natural preference for dealing with fewer service vendors as long as the vendors' products remain strong, and Cloudflare has the potential to leverage its technology and data to launch new software and improve existing offerings.
Despite trading down roughly 80% from its high, Cloudflare has continued to serve up impressive business results. Investors can capitalize by taking advantage of the disconnect between its business and share price performance.
