Berkshire backed Snowflake was the largest software IPO ever rocketing on opening day. We delve into three stocks without the hype that is a better investment.
Oct. 1, 2020
Snowflake‘s (NYSE: SNOW) recent IPO generated a lot of hype and more than doubled on the first day of trading due to overwhelming demand. Snowflake is trading at 120X sales which is a rich valuation compared to the companies below and has a lot to live up to. We take a look at three companies without the fanfare that have produced market-beating returns and continue to grow rapidly.
Fastly
Fastly (NYSE: FSLY) offers cloud computing services which are a “system built by developers for developers”. This edge computing platform and CDN (content delivery network) speed up the delivery of data. This enables companies to handle traffic on websites and apps securely while maintaining a frictionless performance. Due to the stay-at-home economy booming, causing record traffic, the stock has surged over 300% year-to-date (YTD) despite severe volatility.
Fastly recently reported fiscal Q2 2020 earnings where revenue grew 62% year-over-year to $75 million. Total customer count increased to 1,951, up from 1,837 in Q1 and the largest increase in quarterly growth post IPO, while enterprise customers grew to 304 from 297 in Q1, making up 88% of revenue. The stickiness of Fastly’s business is evident in its net retention rate of 138% in Q2 and high profile customers such as Shopify and Amazon.
One of the risks to Fastly is that its largest customer is TikTok, which has accounted fot approximately 12% of its revenue in the first half of 2020. Undoubtedly, the potential ban of TikTok would hurt Fastly’s business, but there is still a massive runway for growth. Management estimates the total addressable market to be $35.8 billion by 2022, a CAGR of approximately 25%.
DataDog
DataDog (NASDAQ: DDOG) is a platform-as-a-service that enables companies to monitor their cloud-based software, which is increasingly essential to the operating of business’, and COVID-19 has accelerated this digital transformation.
It has continued to grow at a fast pace, and the stock is up roughly 150% since its IPO just over a year ago. In Q2 of fiscal 2020 revenue grew by 68% year-over-year to $140 million and also generated a profit for the second quarter in a row. This was driven by an increase in the number of larger customers paying over $100,000+ of 1,015 an increase of 71% from the year prior. The gross margin also improved by 5% to 80% from the year previously.
DataDog has several larger competitors such as IBM, and Cisco which have deep pockets, and the latter attempted to acquire Datadog before its IPO, which was rejected. However, Datadog continues to innovate in R&D (27% of revenue in the last quarter) to stay ahead of the competition. Management sees new growth opportunities, and based on historical performance, shareholders should not be too concerned about these larger competitors.
Okta
Okta (NASDAQ: OKTA) is a founder-led company that offers cloud-based cybersecurity to its customers. The need for cybersecurity has increased in recent years and is only accelerated by COVID-19, driven by greater adoption and use of cloud-based applications. The stock has been on a staggering run since going public in 2017, up over 800%.
In fiscal Q2 of 2021, Okta reported 43% year-over-year growth in revenue to $200.4 million and raised guidance for the fiscal year despite macro uncertainties. The vast majority of this revenue is subscription-based (roughly 95%) and is therefore highly predictable, and management expects to grow revenue by a baseline of 30% until 2024. It has a large and expanding total addressable market worth over $50 billion today.
Okta has continued to add new clients and the number of $100,000-plus revenue-paying customers is now nearing 1,700, an increase of 105 in the last quarter. Okta also has over 100 customers with an annual contract value of over $1 million and total customers are 8,950. Okta believes that the headwinds it has experienced are lasting rather than a temporary bump gaining high profile customers such as LVMH group. The net dollar retention rate for the trailing 12 months is 121% and has continued to upsell despite the pandemic.
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