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Motley Fool Issues Rare “All In” Buy Alert
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After a brief rally in July, the tech-heavy Nasdaq Composite index has fallen 10% over the last month, and the latest round of economic news sent stocks falling hard again in early September. The Consumer Price Index for August came in higher than expected, increasing 0.1%, which put Wall Street on pins and needles again.
If the markets continue to fall, investors might want to focus on companies that experienced the most demand in this environment, such as cloud computing and cybersecurity. Cloudflare (NET -0.77%) CEO Matthew Price said it best: “No company is recession-proof. But some are more recession-resilient than others.”
Image source: Getty Images.
Companies are not going back to legacy data systems that are slower and more costly to operate. The cost savings of cloud-based services have become more important than ever in this inflationary environment. The same can be said for cybersecurity. Cyberthreats are certainly not going away just because of a weak economy.
Here are three companies delivering high revenue growth in these markets that should deliver massive returns to investors over the next decade.
Snowflake (SNOW -0.75%) has emerged as a default option for companies looking for a cloud-based solution to access data without being bottlenecked by on-premise data systems. Snowflake’s Data Cloud platform can be used with any of the major cloud infrastructure providers, such as Amazon Web Services, Microsoft Azure, or Alphabet‘s Google Cloud. Data can even be shared with other organizations through the Snowflake marketplace, which makes the platform more valuable as more users join.
The ability to share data throughout a company’s ecosystem in just a few clicks is a winning card for Snowflake. For example, a business can easily upload and share data with its corporate customers to provide better insight about demand and inventory down the supply chain. That’s an invaluable service with all the supply chain issues during the pandemic.
While the stock fell over valuation concerns this year, eventually the stock will track the company’s growth, which has been exceptional. In the most recent quarter, revenue growth clocked in at a robust 83% over the year-ago quarter. There are more than 6,800 customers using the platform with a high revenue retention rate of 171%, which means customers are spending more with the company after first signing up. Many of the best software-as-a-service providers typically have a revenue retention rate of around 130% or less.
The best part is that Snowflake is delivering this level of growth profitably. Over the last four quarters, free cash flow came in at $292 million on $1.6 billion of revenue. This allows Snowflake to continue investing in new features without sacrificing its debt-free balance sheet.
The company has lots of opportunity across data warehousing, cybersecurity, and data engineering. Its total addressable market is estimated at $248 billion, which should pave the way for years of high growth. I started a position in the stock over the summer and wouldn’t hesitate to buy more in the near term, especially if Snowflake continues to report strong growth on the top line.
The threat of cyber attacks is only getting more severe. Changing technology means cyberthreats also evolve and get more sophisticated over time. That’s why the cybersecurity industry is a ripe field to look for wealth-building growth stocks, and you’ll be hard-pressed to find a faster-growing company than SentinelOne (S -0.54%).
The stock has fallen 45% year to date, but the business has continued to grow like gangbusters. Revenue more than doubled in the first half of the year, with growth accelerating in the second quarter. Management noted that demand for business remains strong, which allowed the company to raise its full-year outlook.
There are several top cybersecurity providers, but the numbers make it clear that customers absolutely love SentinelOne. Compared to its peers, such as CrowdStrike and Palo Alto Networks, SentinelOne executives believe they have superior technology. For example, competitors might take up to an hour to remediate a threat, while SentinelOne’s artificial intelligence-based solution protects endpoint devices, like phones and laptops, in real time.
The biggest concern for SentinelOne is that the company is showing negative free cash flow right now, so investors must have faith that continued growth on the top line will eventually lift profitability. At this early stage of the company’s growth, it’s an acceptable trade-off for what could be a home-run investment.
The company’s market cap is $7.8 billion, whereas CrowdStrike has a market cap of $42 billion. There is clearly a lot of upside for SentinelOne. The cybersecurity market is expected to grow to over $400 billion by 2027. The companies showing the fastest growth are in the best position to deliver market-beating returns, which leaves SentinelOne as a top choice.
You might use Cloudflare everyday without realizing it. Cloudflare’s network infrastructure is used by businesses, websites, bloggers, and apps. It handles more than 10% of all internet traffic. Its technology basically makes applications more secure and faster to operate, while the company makes money from selling subscriptions to use its platform.
The steep sell-off in the stock price over the last year means investors are getting more bang for their buck with this fast-growing business.
Revenue growth remained consistent with the company’s historical trend, growing 54% year over year through the first half of 2022. Management credited spending from large customers for the increase, which now represents 60% of Cloudflare’s business. Generating more revenue from established companies is important because large corporations are more likely to keep spending on digital services, even during an uncertain economic environment.
Cloudflare gets more efficient the more customers join. As the company grows larger, it can more quickly shift customers’ data across an expanding network to improve performance with their applications. On the second-quarter earnings call, CEO Matthew Price noted that a Fortune 500 energy company recently switched to Cloudflare from Zscaler, because the former was easier to use and better-performing.
Like SentinelOne, Cloudflare is generating negative free cash flow, but investors shouldn’t worry too much about that at this early stage of growth. Cloudflare says its addressable market increased from $32 billion in 2018 to $115 billion, and it should keep growing. Most importantly, it is winning over customers from competitors and delivering very consistent revenue growth. Cloudflare is the only stock featured here that I don’t have in my portfolio, but that may change soon.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Ballard has positions in Amazon, SentinelOne, Inc., and Snowflake Inc. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Cloudflare, Inc., CrowdStrike Holdings, Inc., Microsoft, Palo Alto Networks, Snowflake Inc., and Zscaler. The Motley Fool has a disclosure policy.
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