High-growth technology stocks have underperformed the broader markets this year after an impressive run in 2020 as the pandemic acted as a tailwind for several companies part of the sector. But the recent pullback in tech stocks provides investors the opportunity to buy quality growth companies at a lower valuation.
Cloud computing is one tech vertical that continues to grow at an enviable pace, making companies such as Snowflake (NYSE: SNOW) top bets right now. Snowflake provides enterprises with a cloud-based data platform to enable them to consolidate data and drive meaningful business insights as well as build data-driven applications. The company’s rising revenue and improvements in profit margins are two reasons why Snowflake is a tech stock I’m buying right now.
A look at Snowflake’s financials
Snowflake is a company that went public in September 2020 and is currently valued at roughly $101 billion. It touched $429 per share last December and is currently trading 15% lower than its all-time highs, allowing investors a chance to buy the dip. While the S&P 500 Index is up over 20% year-to-date (YTD), Snowflake stock has gained 18.5% in 2021.
Snowflake has increased revenue from $96.6 million in fiscal 2019 to $592 million in fiscal 2021 (ending in January). In the fiscal second quarter of 2022, Snowflake’s revenue more than doubled year-over-year (YoY) to $272.2 million, compared to analysts’ estimates of $256.5 million.
However, its adjusted loss per share was significantly higher at $0.64 compared to consensus estimates of $0.15. A key financial metric for Snowflake is the company’s net retention rate of 169% which suggests existing customers increased spending by 69% year over year on its platform.
What I like about Snowflake?
Snowflake is well-positioned to take advantage of the increasing amounts of data that is generated each year. Further, enterprise data can be located in-house or on public cloud platforms such as Amazon Web Services, Microsoft Azure, and Google Cloud. But these data sets can be easily accessed by Snowflake’s infrastructure agnostic platform.
This flexibility will help Snowflake expand its customer base going forward and this is evident in the company’s revenue forecast as it expects annual product sales to touch $5.6 billion in fiscal 2026. It also expects product sales to touch $10 billion by 2029, which suggests an annual growth rate of 42.4% in the next eight years.
Risks to Snowflake’s share price
Snowflake might lose significant momentum if markets turn bearish, given its sky-high valuation. Wall Street expects revenue to touch $1.15 billion in fiscal 2022, which suggests its trading at a forward price to sales multiple of 88.4x making it one of the most expensive stocks on the market.
Generally, growth stocks grossly underperform the broader markets in a sell-off as investors look to invest in companies with reasonable multiples and expanding profit margins. Further, Snowflake remains unprofitable which will exacerbate the pullback in a stock market correction.
Snowflake’s growth potential
Snowflake is part of the highly lucrative cloud computing space and should benefit from multiple tailwinds going forward. The company’s robust retention rates suggest higher customer engagement, lowering user acquisition costs in the process. Every correction in SNOW stock can be viewed as a buying opportunity for long-term investors.
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Contributing Writer at MyWallSt
Aditya took an interest in the stock market during the financial crash of 2008-09. His favorite stocks include Roku and Apple as both companies enjoy a leadership position in their respective verticals and are poised to beat the broader markets consistently going forward.