Amid the so-called "tech wreck" of 2022 lay some companies with compelling products and bright futures. Among them, CrowdStrike Holdings (CRWD 0.39%), Snowflake (SNOW -0.82%), and Cloudflare (NET -2.27%) are all still growing revenues at an impressive pace. Yet despite that, their shares have lost between half and two-thirds of their value. Here is how they are positioning themselves to lead the next decade in tech.
1. CrowdStrike Holdings
Cybersecurity has become a vital focus for most companies, regardless of industry. A recent post by software company Check Point Software asserted that in the third quarter of 2022, the average organization faced more than 1,100 cyberattacks each week. That was up 28% from the same period in 2021.
But the days of installing software to protect against those threats on each individual computer are long gone. CrowdStrike has been part of the change with its cloud-based artificial intelligence products. Its protection correlates trillions of security events per day to not only identify and neutralize threats, but also to predict them. This service has become especially valuable in a world dominated by remote work.
As of January 2020, it generated $600 million in annual recurring revenue. By this past October, that number had jumped to $1.5 billion. Although the company still has accounting losses, it produced almost $600 million in free cash flow over its last four reported quarters. However, it should be noted that stock-based compensation -- a non-cash item -- amounted to about four-fifths of that figure.
Revenue growth decelerated from above 80% for most of 2020 to just above 50% in Q3 2022. That's still impressive. But the slowdown has contributed to a collapse in the company's valuation. Its price-to-sales ratio has fallen from a high of 66 to just 11. That's Wall Street's perspective. Its clients don't care about the stock price.
The company is growing the number of its subscription customers -- 75% year-over-year in the most recently reported quarter -- and the number of products each client is paying for. That isn't slowing down. The number of customers using four or more modules grew by 71%, 66%, and 68% in the first three quarters of 2022, respectively. As long as it keeps that up, CrowdStrike's valuation should take care of itself over the long run.
2. Snowflake
Snowflake bills its platform as a "single source of truth" for organizations. By offering its data cloud as a unified location for all of an organization's data, it enables customers to analyze their own organization and customers, as well as share data with partners. The combination simplifies the process of developing more meaningful business insights. And its ability to partition data and scale its services on demand helps it deliver optimal performance at the minimum cost. Its customers only pay for what they use.
So far, its growth has been incredible. Snowflake's trailing 12-month revenue climbed from $252 million in January 2020 to $1.74 billion as of October 2022. Remaining performance obligations -- revenue contracted for the future but not yet recognized -- have gone from $426 million to more than $3 billion. The company now has seven times as many customers that spent at least $1 million with it over the past year than it had at the beginning of 2020.
But that growth is moderating. In Q3, its year-over-year revenue growth came in at just 66%. That metric hovered above 100% for most of 2021. Its price-to-sales ratio has fallen from a stratospheric 120 to a still-lofty 24. For comparison, the ratio for the overall S&P 500 index sits just below 2.1 after peaking at 3.0 to close 2021.
Despite the valuation crunch and a stock price that is down almost 60%, the company's future looks bright. Management sees its platform as the next leap forward in a journey that began with on-premises data warehouses in the 1990s. And Snowflake continues to develop new applications -- like cybersecurity -- to expand its value to customers, as well as its addressable market. It might be hard to swallow buying a stock that's still valued so richly. But it is also hard to imagine a limit to how big Snowflake could one day become.
3. Cloudflare
One way to reduce your risk of being hacked is to build your own internet. Cloudflare has done that -- sort of. It has created a content delivery network -- a globally dispersed network of servers -- to improve the performance of internet-connected devices while enhancing protection. Its network is comprised of data centers in 275 cities across more than 100 countries and has been compared to an enormous supercomputer. As traffic passes through the network, Cloudflare optimizes it for speed and security. Customers can even build their own applications on the network to bypass the headache of managing infrastructure.
Cloudflare's growth, too, has been robust. Since the beginning of 2020, its revenue has climbed by around 50% year over year each quarter. Despite that consistent top-line growth, it has lagged when it comes to producing cash. It still only generates about $0.05 for every dollar of revenue. That pales in comparison to the $0.13 per dollar of sales that goes toward stock-based compensation.
Profitability is likely to be an uphill battle. To gain market share, Cloudflare will have to offer a better value proposition than giants like Amazon Web Services, Microsoft's Azure, and Alphabet's Google Cloud. But CEO Matthew Prince is not shying away from the challenge. He's confident the company can quintuple its revenue in the next five years. That would represent 38% annual growth. If it can hit that mark, shareholders will expect more than a few pennies of cash to be generated by each of those extra dollars.
