The stock market tanked in the second quarter. By the end of June, the tech-heavy Nasdaq Composite was 31% off its high and the broad-based S&P 500 was down 21%, putting both indexes in bear market territory. But several of the wealthiest hedge fund managers kept buying growth stocks through the downturn.
For instance, Renaissance Technologies founder Jim Simons more than doubled his position in Snowflake (SNOW 0.20%) in the second quarter, while Soros Fund Management chief George Soros added more modestly to his stake in the company. Millennium Management CEO Israel Englander and Point72 Asset Management leader Steve Cohen increased their positions in Arista Networks (ANET -2.29%). All four investors have a place on the Bloomberg Billionaires Index, so it’s fair to assume they know how to build wealth.
Is it time to follow these billionaires’ leads and buy these two growth stocks?
1. Snowflake: Unlocking value in big data
Snowflake helps businesses make sense of big data. Its cloud platform supports a variety of workloads that have traditionally required multiple point solutions — data ingestion, storage, transformation, and analytics — while eliminating the cost and complexity of managing the underlying infrastructure.
Snowflake also provides data science tools for building artificial intelligence (AI) models, development tools for creating data-driven applications, and collaboration tools that allow customers to securely share, buy, and sell data sets through the platform. That last use case creates a network effect, as the amount of data available for exchange increases with each new customer, adding incremental value for all existing customers.
Snowflake’s ability to run all of those workloads on a single platform distinguishes it from other vendors, and that competitive edge has fueled incredibly strong demand. Snowflake’s customer count increased 36% over the past year, and the average customer spent 71% more. In turn, revenue soared 92% to $1.6 billion, and the company generated positive free cash flow of $293 million, up from a loss of $43 million in the prior year.
Investors should expect that momentum to continue. Digital transformation is making modern enterprise IT environments more complicated, and data is often siloed across different software systems that run across private infrastructure and public clouds. Snowflake eliminates the complexity of using multiple legacy solutions, and it empowers businesses to unlock the value in their data.
To that end, the company puts its addressable market at $248 billion by 2026, leaving a long runway for growth. Shares currently trade at a pricey 32.6 times sales, but that valuation is much cheaper than the historical average of 89.2 times sales. Moreover, it seems like a reasonable price to pay in light of Snowflake’s sizzling growth and sizable market opportunity. That said, investors should be prepared for volatility, and it makes sense to start with a very small position.
2. Arista Networks: Connecting cloud and enterprise data centers
Arista provides high-speed networking technology to cloud and enterprise data center operators. Its hardware portfolio includes switches, routers, and wireless access points, which facilitate the movement of information through data centers and enterprise campus environments. Arista also provides adjacent software for network automation, monitoring, and security.
That said, Arista’s core innovation is the Extensible Operating System (EOS). A single version of EOS runs across every piece of Arista hardware, which means customers can deploy a seamless network across their entire IT environment, from private data centers to public clouds, across wired and wireless workspaces. By comparison, legacy vendors like Cisco Systems use multiple operating systems, making network management and workflow orchestration more cumbersome. Also noteworthy, Arista exclusively sources chips from third-party suppliers like Intel and Broadcom, allowing it to bring state-of-the-art platforms to market more quickly and cost-efficiently than vendors that build custom chips.
To that end, Arista offers networking platforms with industry-leading speed and capacity, with a lower total cost of ownership. It has also earned a reputation for high-quality customer support, as evidenced by its world-class net promoter score of 80. Collectively, those assets have helped Arista win big customers like Microsoft and Meta Platforms.
Not surprisingly, the company has delivered strong financial results on a regular basis. Over the past year, revenue rose 33% to $3.5 billion and earnings surged 41% to $3.24 per diluted share.
Arista is well positioned to maintain that momentum. It leads the high-speed switching market (i.e., 100 gig, 200 gig, and 400 gig switches), and demand for fast networking solutions should continue to rise in the coming years as several secular trends — cloud computing, AI and 5G applications, the Internet of Things — place incremental strain on data centers. To that end, management puts its addressable market at $35 billion by 2025.
Shares currently trade at 10.8 times sales, slightly above the five-year average of 10.1 times sales. But given the potential upside, this stock is still worth buying.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Arista Networks. The Motley Fool has positions in and recommends Arista Networks, Cisco Systems, Intel, Meta Platforms, Inc., Microsoft, and Snowflake Inc. The Motley Fool recommends Broadcom Ltd and recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.