Market Recovery: 3 Software Stocks to Buy Before It's Too Late

The stock market has just suffered its worst performance in the first half of a year in decades. The decline profoundly affected growth stocks, and some sell at more than a 75% discount from 52-week highs.

However, the S&P 500 has climbed out of bear market territory, and the Nasdaq Composite has risen by approximately 20% from its June lows. Such a recovery may indicate it is time to consider growth tech stocks such as Snowflake (SNOW 0.48%), Twilio (TWLO 1.54%), and Spotify Technology (SPOT 0.73%).

Good fundamentals won’t keep this tech company’s stock down for long

Justin Pope (Snowflake): Bear markets are frustrating because they can bring all stock prices down, like a tide that goes out at sea lowering all ships; there’s nothing you can do about it. Buying stocks in a down market never feels fun, but it often proves an intelligent decision when things get better.

Snowflake is the perfect candidate for a market recovery rebound. Everything you do online produces data that can be tracked and analyzed; it’s like leaving digital footprints. Companies can use that data to learn about you and the products and services they sell, making data very valuable. But data is often messy and fragmented; trying to make sense of a pile of data from many sources can quickly become a nightmare.

Snowflake’s cloud-based data warehouse is a place where data can be stored, integrated, and analyzed. It takes all the randomly shaped puzzle pieces (data) and helps companies fit them together to see the big picture. Users can run queries to quickly find what they are looking for.

The company grew revenue by 106% year over year in its fiscal year 2022, ending Jan. 31, 2022. Revenue has totaled $1.4 billion over the past four quarters, and management believes it will hit $10 billion by 2029. Just 6,300 customers use Snowflake today, so there is tons of room for the growth needed to achieve that goal.

Snowflake is generating free cash flow; it’s already converting 16% of its revenue into cash profits despite a long road of growth and expansion ahead. Seeing the business turn cash flow positive this early is a good sign of how profitable the company could become down the road; management believes it will eventually increase its free cash flow to 25% of revenue.

The company’s IPO came at a time when the market was euphoric, and the stock’s strong growth and a healthy dose of investor excitement pushed the stock to a price-to-sales ratio (P/S) of more than 150, arguably the most expensive name on Wall Street at the time.

Now at a P/S of 36.98, the stock’s come down to Earth. I wouldn’t call its current valuation cheap, but long-term investors should see the company grow into its valuation and then some if it executes its long-term growth goals.

The company making much of the current tech boom possible

Will Healy (Twilio): Companies such as Airbnb, DoorDash, and Lyft would struggle to conduct business if not for cloud-based communications conducted through smartphones. For this service, such companies choose Twilio more often than any other company.

Twilio supports voice, video, chat, and email communications on one platform. While it is not the only company providing a communications platform-as-a-service (CPaaS), it is the one with the largest market share. Moreover, switching platforms is a highly disruptive process for its clients, dramatically lowering Twilio’s likelihood of losing clients.

Furthermore, it has added to its competitive advantage with ready-made products such as Flex and Segment. Flex acts as a built-in customer contact center, while Segment compiles customer data that it can transport where needed. These products save customers time since they would otherwise have to build such applications from scratch.

These offerings helped Twilio to generate more than $1.8 billion in revenue in the first half of 2022, 38% higher than in the same period last year.

Still, challenges remain. The cost of revenue was up 51%, and operating expenses rose 36%. Consequently, net losses during the period increased to $544 million in the first two quarters of 2022, up from $434 million in the year-ago period. Also, the company predicts revenue growth will slow to the 30%-to-32% range in the third quarter, which led to a one-day drop in the stock price of 13%.

However, analysts forecast the company will turn profitable in 2023 after posting years of losses. Moreover, its P/S ratio of just under five is near all-time lows for the stock.

Additionally, the stock has fallen by more than 80% compared with its intraday peak of about $457 per share in February 2021. Such an increase in the stock price and the prospect for profitability could make Twilio stock a buy despite its Q3 outlook.

Spotify is benefiting from the growth of audio streaming

Jake Lerch (Spotify): It’s part of human nature: We love to listen. Music. Stories. Lectures. Some things work best when we hear them rather than see or read them.

This is one of the reasons I love Spotify. The company focuses on bringing audio content from creators to listeners. And while the company is a “streamer,” it doesn’t directly compete with NetflixDisneyParamount, et al. in the video streaming wars. 

Instead, Spotify concentrates on audiophiles. It offers a vast library of music and podcasts. It’s also keen to expand into audiobooks. 

Financially, the company just reported a superb quarter. Management raised guidance; key metrics like monthly active users surged. 

Nevertheless, Spotify shares are down about 50% year to date — hit by the same swoon that has pushed the Nasdaq Composite down 20% this year. 

However, for investors looking for a growth stock with plenty of runway ahead of it, Spotify might be a wise choice. Wall Street expects the company to generate $12 billion of revenue this year. Analysts expect revenue to grow to $13.8 billion in 2023. That’s good for a growth rate between 12.5% and 15% over the next 18 months. 

What’s more, Spotify shares are trading at a historically low valuation. The company’s price-to-sales ratio (P/S) is 1.97. That’s near its all-time low of 1.51 and well below its three-year average of 4.25.

In addition, the company’s chief executive officer, Daniel Ek, bought $50 million worth of shares back in May. While not all insider buying is well timed, so far, Ek’s investment has paid off. Spotify shares have jumped about 17% since his purchase. Retail investors looking to play the audio streaming market might be smart to follow his lead. 

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