The current bear market undoubtedly tempered enthusiasm for growth stocks, particularly those in the tech sector. And stocks that once boasted high revenue growth rates have seen revenue rise at a considerably slower pace or, sometimes, fall into decline.
Some companies, particularly cloud stocks, did manage to maintain their rapid growth in the current environment, even if their stock prices don't necessarily reflect it. Amid the bear market, growth stocks Snowflake (SNOW 2.53%) and Zscaler (ZS 0.30%) now sell at significant discounts and much lower valuations, a condition that could spark a revival in these two formerly hot stocks.
1. Snowflake
Snowflake offers consumption-based access to a data cloud platform, something better known as "data-as-a-service." Its software facilitates the storage, security, permissions, and use of a company's data by storing it in the cloud.
The value proposition of its specific platform is twofold. For one, it allows data management to take place in a centralized location. Before the data cloud, companies would have to store data on private servers. That arrangement often prompted different users to make multiple data copies, making any possible changes in each data copy difficult to track.
Secondly, it leads the industry with regard to interoperability. This way, users know the data is usable regardless of whether they use cloud services from Amazon Web Services, Microsoft's Azure, or another provider.
Snowflake sees this interoperability advantage as a $248 billion opportunity. Hence, even though the $1.5 billion in revenue it generated in the first nine months of fiscal 2023 (which ended Oct. 31) grew 77% year over year, Snowflake has barely scratched the surface of its potential.
The massive growth also did not shield Snowflake from the bear market, as the stock has fallen by almost 70% from its all-time high set in November 2021. Also, with the stock still trading at a price-to-sales (P/S) ratio of 21, it's understandable that investors might assume it has further to fall.
However, the data cloud's value proposition and Snowflake's competitive advantages bode well for the company. That edge, along with the addressable market and discounted valuation, likely means it is not too late to buy Snowflake stock.
2. Zscaler
Zscaler provides cybersecurity geared to match the changing tech environment. While security approaches of the past worked in an era dominated by servers and desktops, a new strategy became necessary as organizations needed security for smartphones and other portable devices that are widely used today.
To offer this protection, Zscaler employs what it refers to as "zero trust" security, meaning its software considers all users to be potential attackers until proven otherwise. Instead of relying on a firewall, its software uses artificial intelligence, evaluating factors such as roles, users, and locations to assess user privileges. And since the platform uses edge computing to put its systems physically closer to potential threats, it can make such decisions more quickly.
These attributes helped its rapid growth continue despite an increasingly sluggish economy. In the first quarter of fiscal 2023 (which ended Oct. 31), its revenue of $356 million rose 54% versus year-ago levels. And while it posted a loss, it reported $96 million in free cash flow during fiscal Q1.
Nonetheless, investors have cooled on the stock as the $105 million in stock-based compensation expenses prevented it from earning a profit.
Moreover, the software-as-a-service stock has dropped by more than 70% since reaching an all-time high in the fall of 2021. That took its P/S ratio, which had exceeded 60 in late 2021, down to 12. Although that sales multiple is an all-time low for Zscaler, it may be a higher valuation than some investors will willingly stomach in a bear market.
However, given the costs and operations efficiencies offered by the cloud, demand for cloud security products will probably remain robust amid economic struggles. That factor alone should return Zscaler stock to a growth trajectory over time.
