Despite a 4% pop to open the new year, the technology-heavy Nasdaq-100 index is still a long way from recovering its 33% loss from 2022. Many individual stocks fared even worse last year but despite what their stock prices indicate, some have experienced phenomenal growth in their underlying businesses -- and in the end, that's what investors should be looking for.
A panel of Motley Fool contributors has identified the top 20 fastest-growing companies on the planet and picked three of the standout performers. They are Datadog (DDOG +2.54%), Snowflake (SNOW +0.30%), and Zoom Video Communications (ZM +1.55%). Even though their sales are soaring, their stock prices remain suppressed, and that spells opportunity for investors.
NASDAQ: DDOG
Key Data Points
An essential tool for the cloud
Anthony Di Pizio (Datadog): Businesses small and large are in the midst of a seismic transformation into the digital realm using cloud computing technology. The cloud is truly revolutionary; by operating online, businesses can build a wider geographic footprint, reduce friction for customers, and automate several everyday tasks -- and the cost of this technology continues to shrink.
But it does create some challenges. For example, determining customer satisfaction in a physical store is pretty easy; a person can consult an employee directly and provide instant feedback, prompting an immediate resolution to any issues that may arise. In the online world, however, a business might be dealing with thousands of faceless customers and if they have a bad experience, they often jump to a competing store without ever saying a word. A drop in sales might be the only indicator, and by then it's too late to react.
That's where Datadog comes in. It's the ultimate cloud monitoring tool used across a variety of industries from retail to entertainment to gaming. Datadog can alert businesses to website or application bugs as soon as they occur, and most importantly, before they result in lost revenue. It can pick up on issues that might only be affecting a small subset of customers or users in a specific geographic area, for example, which might otherwise go unnoticed.
Naturally, large organizations with a more complex digital presence are finding Datadog the most useful. As of the third quarter of 2022 the company had 2,600 customers spending at least $100,000 each year.
Despite its stock price falling 62% from its all-time high amid the broader tech sell-off, Datadog's revenue has soared at a compound annual rate of 65% over the past three years. That makes it one of the fastest-growing companies on the planet, so its weak stock price might represent a great opportunity for investors to buy now.
NYSE: SNOW
Key Data Points
A growth stock that could keep on growing
Jamie Louko (Snowflake): It's been challenging to find another public business that has consistently expanded faster than Snowflake. Since the company came public in late 2020, Snowflake has yet to see a quarter where revenue hasn't soared over 60% year over year.
This adoption is not terribly surprising because the company operates in a vital, fast-moving industry. Snowflake is building the future by offering businesses a unified location for all their data. When it comes to large enterprises, many businesses store data on multiple platforms. However, analyzing that data to drive business decisions can be difficult when it is spread across competing clouds. Snowflake breaks down this wall, helping companies gain an edge by analyzing all their data together.
Don't believe that this is a vital part of an organization? Just look at the company's meteoric rise. In Snowflake's fiscal third quarter -- which ended Oct. 31, 2022 -- revenue soared 67% year over year to $557 million. Comparatively, Snowflake generated just $592 million in revenue during its entire 2021 fiscal year, which ended Jan. 31, 2021.
This rapid adoption is being driven largely by preexisting customers. Once an enterprise starts using Snowflake, it realizes how valuable it is. These businesses subsequently become more reliant on Snowflake, as seen by the company's world-class net retention rate of 165% in Q3.
The stars seem to be aligning for Snowflake as it capitalizes on this lucrative industry, and profitability is coming with it. The company has seen its non-GAAP (adjusted) free-cash-flow margin rise from negative 12% in fiscal year 2021 to 21% in the first nine months of fiscal 2023. With climbing cash generation, massive adoption, and its criticality to businesses, Snowflake looks like a company to buy on the dip and own for the long haul.
NASDAQ: ZM
Key Data Points
One of the fastest-growing software companies in history
Trevor Jennewine (Zoom Video Communications): Zoom is a cloud communications company best known for Zoom Meetings, a videoconferencing application that became ubiquitous during the pandemic. Its immense popularity propelled Zoom's annual revenue run rate to $2 billion in 2020, just nine years after the company was founded. No software company has ever hit that milestone more quickly.
Of course, growth has slowed substantially over the last two years. In fact, third-quarter revenue rose just 5% to $1.1 billion and cash from operations actually dropped 25% to $295 million. But investors need to consider those numbers in context. In spite of the recent deceleration, Zoom has still grown revenue at 100% annually over the last three years, and the company is well positioned to reaccelerate revenue growth in the future.
Churn from online customers (who that adopted Zoom Meetings through self-service channels) has been the primary headwind to top-line growth. In fact, third-quarter revenue from enterprise customers (those engaged by a direct sales team) climbed 20%. Fortunately, churn rates in the online cohort have now returned to pre-pandemic levels, and management expects revenue from online customers to stabilize by the middle of next year.
Also noteworthy, Zoom now has a far more robust portfolio than it did before the pandemic, which means its value proposition for customers is much more compelling. Its newer products include cloud phone system Zoom Phone, customer service solution Zoom Contact Center, and artificial intelligence tools that boost productivity for sales teams and customers service agents. In a nutshell, Zoom has evolved from a videoconferencing software vendor into a full communications company.
That transition should excite investors for two reasons. First, Zoom can address the communications needs of its customers more completely, and given its market leadership in videoconferencing software, Zoom is well positioned to drive adoption of adjacent products like Zoom Phone and Zoom Contact Center. Second, Zoom now has a much larger total addressable market (TAM). In fact, management says its TAM will reach $125 billion by 2026, meaning the company has plenty of room to grow.
There is one more metric worth mentioning. Zoom reported 32% growth in remaining performance obligation (RPO) in the third quarter. RPO is a leading indicator of future revenue, and its rapid growth implies better days ahead for Zoom. Shares currently trade at 4.7 times sales -- a serious bargain compared to the three-year average of 34.9 times sales. That's why investors should buy a few shares of this growth stock today.
