Investors are more cautious than ever following a difficult and volatile year for the stock market. People are eager to invest for a potential market recovery, but it's hard to figure out which stocks are smart buys.
Investors with long-term vision should consider these three stocks with excellent drivers of both stability and growth. All three could end up being smart buys right now.
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1. Veeva Systems
Veeva Systems (VEEV 0.91%) is a healthcare technology stock that keeps a low profile despite having a number of attractive qualities. The company dominates its target market, with more than 1,000 customers across the life sciences industry, including most of the major pharmaceutical companies.
Veeva's product suite has become an essential tool for numerous functions, including product development, research, clinical trials, regulatory compliance, and marketing. That makes Veeva "sticky," keeping its customers engaged and creating a barrier to entry for other potential competitors. Its specialization in life sciences also wards off more generalized players in the customer relationship management (CRM) space.
Veeva's financial results demonstrate all these qualities in action. Despite experiencing a slowdown, the company reported a 16% revenue expansion year over year in the most recent quarterly earnings report. That far outpaces the global economy, which is an important catalyst for the stock.
Veeva also reported 119% net dollar retention among subscribers. This means that a high percentage of its subscription customers were kept on the books year over year, and that customers are expanding their subscriptions. That's a strong indicator of high customer satisfaction, a wide economic moat, and an effective sales strategy.
Investors should love that metric. High growth and retention are fueling free cash flow that is poised to approach $1 billion this year.
Veeva's valuation is still firmly in the growth stock range, but it's hit the cheapest price relative to free cash flow in years. Expensive valuations can lead to volatility, extending the time required to pay off. Long-term growth investors still have a chance for strong returns here.
2. Salesforce
It's been a tough run for Salesforce (CRM 0.42%) shareholders, as the stock is down over 40% from its all-time high. That's unfortunate, but it also creates an opportunity for investors who like the company's long-term prospects.
As we've seen throughout the tech sector, Salesforce's growth has slowed over the past year. Its annual revenue growth rate tumbled from over 25% to 14% over the past 12 months. The CRM leader is struggling against natural headwinds as its scale increases and it reaches market saturation.
However, temporary macroeconomic conditions are also contributing heavily to the recent swoon. That shouldn't necessarily impact long-term forecasts, and Salesforce is still outpacing the economy in general and most stocks -- even at this depleted level. The growth narrative is still intact, and it's fair to expect acceleration when the global economy turns around.
Salesforce's wide economic moat instills confidence that it can ride out the temporary storm. The company has a sustainable competitive advantage due to its large scale, massive R&D budget, and high switching costs. It's difficult for any large competitors or new entrants to match the quality and scope Salesforce.com is offering. Even if a competitor were able to produce a superior product, it would still be difficult to pry customers away. Salesforce is operationally critical in numerous functions for many customers, making it an expensive, high-risk hassle to switch over.
Those subscriptions are likely to keep rolling in, producing more free cash flow each year. Shares of Salesforce are now available with a P/E ratio of 30, which is a great value for such strong fundamentals.
3. Zscaler
Zscaler (ZS 1.28%) is a leading cybersecurity stock that got battered despite producing excellent financial results. The stock's valuation was out of control in the pandemic bull market, and share prices slumped 60% as valuations rationalized amid rising interest rates. Now, savvy growth investors have to consider this opportunity.
Zscaler is an industry leader in edge security. Simply put, the company's product suite helps to protect large organizations' networks from cyber threats that can access sensitive data through user devices. Several high-profile cybersecurity events in recent years were the result of phishing attacks that allowed hackers to infiltrate corporate networks. This is exactly the sort of activity that Zscaler helps to curb.
Demand for these sorts of security solutions is surging amid the digital transformation of the global economy and the rising prevalence of remote work. Businesses of all industries face evolving problems that are here to stay, creating enormous catalysts for leading vendors of cybersecurity software.
Zscaler has capitalized on those conditions. The company reported 54% year-over-year revenue growth in its most recent quarter, along with strong new bookings figures. It also produced around $100 million in free cash flow during that quarter, helping to ease concerns about Zscaler's failure to achieve accounting profitability.
Concerns about Zscaler's slowdown and runaway valuation were warranted, but the pendulum has swung in the other direction. High interest rates might keep the stock down for the time being, but long-term investors have an opportunity to capitalize on a standout leader in one of the world's highest-growth industries.
