Technology investors are hopeful after seeing the Nasdaq-100 index trade up by 20% so far this year. The index is bouncing back from a 33% plunge for all of 2022, its worst annual loss since 2008. With economic challenges like high inflation showing real signs of easing, there might be room for even further upside.
Some of that upside might be sparked by the latest earnings season. Over the next several weeks, hundreds of companies will report results for the quarter that ended March 31, and investors are watching closely to see how the uncertain economic environment affected their financial performance.
I'm watching two companies in particular. Both of them will report their results in May, and here's why their stock prices could see further gains in the aftermath.
1. Duolingo might exceed investors' expectations yet again
2022 was an extremely difficult year for most companies. Consumers pulled back on their spending in the wake of inflation hitting a 40-year high, which prompted the U.S. Federal Reserve to embark on its most aggressive campaign to hike interest rates in its history. As a result, the American technology sector slashed its growth forecasts and laid off thousands of employees.
A small handful of companies outperformed all expectations during this rough time, including Duolingo (DUOL 3.64%). Its business was so strong that it raised its 2022 revenue forecasts three times throughout the year. And when its final results for the year eventually came in, its $369.5 million in revenue was still above guidance. I'm looking for more of the same in the first quarter of 2023.
Duolingo is the world's leading digital language education platform. It takes a mobile-first approach and delivers a gamified, interactive learning experience that takes lessons out of the classroom and drops them right into the user's pocket. In the fourth quarter of 2022, 60.7 million people were using Duolingo each month, and 4.2 million of them were paying a monthly subscription to unlock additional features. That was a 67% year-over-year increase in paying users, which is why the company has consistently outperformed its revenue guidance.
That growth might be set for acceleration because the platform just released a new subscription called Duolingo Max. Through a partnership with ChatGPT developer OpenAI, Max uses artificial intelligence (AI) to provide personalized feedback to users based on their mistakes in each language lesson. Plus, it introduces a new feature called Roleplay, which users can chat with to improve their conversational skills in their desired language.
Duolingo's Q1 report should offer clues as to how Max is resonating with users. Duolingo stock is already up a whopping 98% so far this year, and if its Q1 revenue comes in above the forecasted $114 million, expect it to extend those gains.
2. Snowflake continues on its path of disruption
Snowflake (SNOW 3.69%) is the creator of the Data Cloud, a revolutionary cloud computing platform that breaks down silos by aggregating customer data in one place. It enables maximum visibility for complex organizations that might store information with multiple cloud providers, and it offers a powerful analytics engine to help customers derive value from their data sets.
But the company is now tackling a new frontier by attempting to disrupt the application development segment with its Snowpark platform. It allows developers to write code for tools like machine learning in the programming language of their choice, and run that code through Snowflake without the need for any additional infrastructure. It allows development teams to keep their data in one place, which streamlines workloads.
Snowflake says one Fortune 500 customer's workloads run eight times faster and at 30% of the cost on Snowpark compared to a competing tool. The platform was made generally available to customers last quarter, so it's likely to have gained further traction in Q1, which is the first reason Snowflake's financial results could outperform.
Here's the second reason Snowflake stock could see a boost from its fiscal 2024 first-quarter results: It set a relatively low bar in its guidance, which, at the high end, points to revenue of $573 million, representing sequential growth of just 4%. In every single quarter of fiscal 2023 (ended Jan. 31), the company handily beat its forecasts and I'm looking for that trend to continue.
Third, Snowflake was one of just a few tech companies hiring employees over the last 12 months. It was a net hirer in all four quarters of fiscal 2023, adding 1,892 new staff overall. It grew its research and development team the fastest of any of its four departments, increasing headcount by 75% in the year. The company plans to add another 1,000 workers in fiscal 2024, which is a good sign it's experiencing strong demand for new products and services, which is a precursor for future growth.
Finally, Snowflake stock is trading flat this year. It now trades at a price-to-sales (P/S) ratio of 22, which is near the cheapest valuation since it went public. It shrinks to 16 on a forward basis (based on $2.7 billion in expected fiscal 2024 revenue), which appears even more attractive. Both are far below the stock's peak P/S ratio of 101.
If Snowflake delivers a positive Q1 report, investors might swoop in and take advantage of that discount, which would help its stock price extend its 2023 gains.
