Over time, the U.S. market proved to be a powerful and cost-effective tool for building wealth for long-term investors. For example, the S&P 500 delivered a long-term average annual return of about 10% before inflation.
However, to fully leverage the compounding effect in the stock market, it makes sense for investors to avoid the hype and instead invest in companies with robust fundamentals and a solid vision. Investors should also be aware that corrections are a normal part of the investing cycle, and can help them pick up high-quality stocks at significant discounts.
Against this backdrop, here's why Snowflake (SNOW 3.69%) and Twilio (TWLO 1.47%) -- growth stocks that are trading at 51% and 81% discounts to their all-time highs -- are smart picks now.
Snowflake
Data has become the lifeblood of the current artificial intelligence (AI)-powered digital world. Many enterprises consider Snowflake's cloud-native data platform indispensable for their AI strategies. The company's platform enables organizations to manage, store, and process vast quantities of structured and unstructured data across various sources, formats, and systems.
Snowflake continues to benefit dramatically from legacy vendors migrating data and workloads from on-premise infrastructures to the cloud. Besides the initial migration phase, existing customers are also increasing usage of Snowflake's platform over time as well as adopting it for new and evolving workloads. Subsequently, the company's customer base expanded 23.5% year over year to 8,907 at the end of the third quarter of fiscal 2024 (ending Oct. 31, 2023). Besides focusing on U.S. clients, the company is also working on gaining traction in markets in Europe and Asia.
Snowflake's capability to handle unstructured and streaming data also emerged as a major competitive advantage. The third quarter saw a 17x year-over-year increase in the consumption of unstructured data on its platform. Moreover, nearly 1,500 customers were also using Snowflake's Dynamic Tables streaming capability at the end of the third quarter.
Snowflake's innovation engine is also running at full speed, with Snowpark being a prime example. Many customers started using the Snowpark feature to write customized code in their preferred programming languages, which execute seamlessly on the Snowflake platform. The uptake of Snowpark has been quite healthy, with a 47% surge year over year in the third quarter and a 500% year-over-year spike in October 2023 alone. Another feature, Document AI, is helping convert unstructured data into more manageable semi-structured format for analytical processing. This is a crucial capability considering that unstructured data accounts for 80% of the world's total data.
Lastly, Snowflake's consumption-based pricing model is proving to be a masterstroke. This feature has proved particularly valuable in times of economic uncertainty since clients can ramp up or scale their usage easily.
All these tailwinds translated into impressive financial performance for Snowflake. In the third quarter, product revenue jumped 34% year over year to $698 million. Adjusted operating margin improved year over year by 200 basis points to 10%, driven by revenue outperformance as well as improved hiring scrutiny. Finally, the company posted a healthy adjusted free-cash-flow margin of 15% in the third quarter.
Considering these tailwinds, Snowflake seems to be a compelling pick now, despite being down 51% from its all-time high set in November 2021.
Twilio
Twilio, a prominent cloud communications platform, helps clients to seamlessly integrate multiple communication capabilities such as text, voice, email, video, and chat into their applications. The company emerged as a major beneficiary of the rising demand for scalable, reliable, and developer-friendly cloud-based communication solutions in the increasingly digital world.
Twilio's cloud-based customer service centers help clients realize significant cost savings since traditional setups involve heavy infrastructure investments such as office space and on-site servers. Further, cloud-based communication centers are also more flexible and scalable to meet the evolving needs of clients. Twilio also upsells multiple APIs (application programming interfaces) and pre-built solutions to its existing customers. This approach not only brings incremental revenue, but also entrenches the platform deeply in the clients' communication strategies.
Twilio's focus on developing new capabilities and features is also a significant growth driver. The company recently completed the migration of its communications business to a 10-digit long code (10DLC) system. While a challenging change, this capability is helping improve network security and reduce spam and fraud messaging as well as other malicious activities. Twilio also leveraged AI to accelerate and improve the efficiency of this migration. Another impressive feature, CustomerAI Predictions, is already being used by nearly 100 customers. Customers leverage the power of predictive AI for improved audience targeting and personalizing multichannel communication strategies based on the lifetime value that can be generated by their clients.
Twilio has been struggling with slowing top-line growth and the absence of generally accepted accounting principles (GAAP) profitability in recent quarters. However, the company is now focusing on cutting costs as is evident by a 16% year-over-year decline in stock-based compensation expenses in the first nine months of 2023 to $509 million. Further, the company is changing its management team to accelerate top-line growth and improve profit margins. Twilio is trading at a price-to-sales (P/S) ratio of 3.3x, far lower than its 12-year average valuation of 12.1x.
Despite being down 81% from its all-time high set in February 2021, Twilio's robust value proposition and bargain-basement valuation makes it a tempting pick now.
