Growth stocks have been pummeled this past year by an onslaught of unfavorable macroeconomic conditions including inflation and rising interest rates. But the tough times won't last forever.
While it's impossible to say exactly when the next bull market will kick off, history has shown again and again that the market always bounces back, even from the most challenging periods. Crucially, investors who back the right companies in the midst of bearish conditions tend to enjoy tremendous returns down the line.
With that in mind, read on for a look at one top growth stock down roughly 60% from its high that's worth owning for the long haul.
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Crucial services and a top-tier management team
Amazon, Microsoft, and Alphabet stand as the market's largest suppliers of cloud infrastructure services. Between websites and applications, the vast majority of large businesses rely on services from more than one of these providers. While multi-cloud setups have become the norm, it's actually not easy to combine and analyze data generated across these distinct cloud-infrastructure services.
Snowflake's (SNOW 1.28%) Data Cloud platform solves this problem and allows its customers to get a far more comprehensive data and analytics picture. This is already a mission-critical service for many businesses, and it will only become more essential as digital transformation trends continue to reshape global commerce.
On the management front, investors can be confident that Snowflake is in very capable hands. Its president of the products division, Benoit Dageville, was co-founder of the company in 2012. Since the company's formation a little over a decade ago, Dageville helped shape the overall data-warehousing category and made Snowflake a category leader in this increasingly important niche.
Meanwhile, CEO Frank Slootman stepped into the chief leadership role at the company in 2019 after previously serving as chief executive at ServiceNow for roughly six years, during which revenue climbed from $100 million to $1.4 billion. This is the kind of team you want for driving an innovative, rapidly expanding business.
Impressive momentum and a long runway for expansion
While the company started to feel macroeconomic headwinds this past year, it should continue to post relatively strong sales growth in 2023. Snowflake ended the fiscal 2023 third quarter (the three-month period ending Oct. 31, 2022) with remaining performance obligations of $3 billion, up 66% year over year, and it's providing services that have become essential for many large customers.
Midpoint guidance called for product revenue to grow roughly 49.5% in fiscal 2023's fourth quarter (ended Jan. 31), and management expects 47% annual growth in product revenue in the current fiscal year.
Strong sales growth is a testament to the fact that Snowflake is providing high-quality, in-demand services, but the company is in the early stages of carrying out a much larger, more ambitious part of its long-term growth strategy. With disruptive victories in the data analytics and collaboration spaces already achieved, the software company is now aiming to disrupt app development itself.
Because it enables clients to easily combine and act on data from disparate sources, Snowflake's platform offers some powerful advantages when it comes to developing and running applications. Building and running software natively on Snowflake's platform can allow more efficient and comprehensive integration of valuable data.
It's here that the long-term promise of the company's usage-based billing model really begins to shine. As a growing number of applications are built and scaled on its platform, Snowflake will see customers use more services in conjunction with scaling engagement for their applications.
Snowflake expects to reach roughly $10 billion in revenue for its 2029 annual fiscal period, which ends in January of that year, and post an adjusted free-cash-flow margin of roughly 25%. Putting the highly growth-dependent nature of the company's current valuation in perspective, the stock is trading at roughly 20 times its free-cash-flow target for the 2029 fiscal year. But crucially, the company's long-term growth story might still be in the relatively early innings at that point.
SNOW PS ratio (forward) data by YCharts.
With the data services specialist valued at 25 times expected sales for fiscal 2023, investors should proceed with the understanding that Snowflake is a high-risk stock. But the company appears to be building the foundations for incredible long-term performance, and risk-tolerant investors who buy shares at today's prices could see very strong returns down the line.
John Mackey, former 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. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Microsoft, ServiceNow, and Snowflake. The Motley Fool has a disclosure policy.
