The U.S. Federal Reserve increased the benchmark interest rate by 25 basis points from 4.75% to 5% on March 21. This has disappointed the market, which was speculating about the possibility of the central bank pausing interest rate hikes in response to the banking crisis. The recent interest rate hike, the ninth one in a row, has increased worries about higher borrowing costs and the rising possibility of a recession. These fears also affected the stock market, with many growth stocks suffering setbacks on March 21.
Although investors may prefer to sit on the fence during the current times of heightened uncertainty, this may not prove to be a smart move. Historically, most stock market corrections have been followed by a bull rally. Hence, it makes sense to pick up shares of high-quality businesses such as Snowflake (SNOW 1.38%) and Alphabet (GOOG -0.67%) (GOOGL -0.79%) that have the potential to grow rapidly during a bull rally.
Snowflake
Shares of leading cloud-based data-warehousing company Snowflake tumbled after the company released its fourth quarter of fiscal 2023 earnings (ending Jan. 31, 2023). Although investors are currently disappointed with the company's fiscal 2024 revenue outlook (40% year-over-year growth to $2.7 billion), the long-term growth story is still intact.
Snowflake's cloud-data platform provides cloud-native data storage and analytics services to users. The platform helps clients to break data silos to form a single, unified view of data, query data, and share the data with partners.
With around 118 zettabytes of data estimated to be generated and consumed in 2023, the demand for data-warehousing services has continued to grow at a rapid pace. Snowflake is well positioned to benefit from this opportunity and estimates its target addressable market (TAM) to be worth $248 billion by 2026.
Snowflake's data-warehouse platform has several advantages. First, it works seamlessly with any cloud provider such as Amazon's (AMZN 0.01%) AWS, Microsoft's (MSFT 0.52%) Azure, or Alphabet's Google Cloud. Second, the data platform separates computing and storage services -- resulting in higher scalability of computational or data resources with minimal disruption or downtime. Third, Snowflake has adopted a usage-based pricing model, which implies that consumers are charged only for the data or computation resources that they actually use. While this may impact the company's performance in the short run, it offers clients higher flexibility, thereby reducing overall customer churn. Finally, the company enjoys the first-mover advantage in creating a data marketplace for enterprises to buy, sell, or share data and applications. This enables companies to derive insights and make informed decisions. The data marketplace also benefits from the network effect; the value of the platform increases as more and more companies join and share on the platform. These differentiating factors have enabled Snowflake to build a sticky customer base.
Snowflake reported stellar results in fiscal 2022 (ending Jan. 31, 2023). Revenues were up by 69% year over year to $2.1 billion, while free cash flow soared by 512% year over year to $496.5 million. Additionally, although Snowflake is not yet generally accepted accounting principles (GAAP) profitable, it is close to reaching breakeven in the coming years.
Against this backdrop, investors who buy the shares now can reap the benefits of the company's robust growth trajectory in the long run.
Alphabet
The launch of the ChatGPT-powered version of Microsoft's Bing search engine has caused significant anxiety to Alphabet's investors. Fears about Bing overthrowing Google's dominance in the advertising-supported internet search market have had a detrimental impact on the company's share prices. The recent slowdown in ad spending is also not helping Alphabet's case.
However, Alphabet stands to benefit from several powerful secular tailwinds. The global search-engine market size is expected to grow from $167 billion in 2021 to $349 billion in 2028. Google is well positioned to benefit from this opportunity, considering that it accounts for 83.84% market share. Bing, the second dominant player in the global search-engine market, accounts for only an 8.88% market share. Alphabet has also been working on developing "generative artificial intelligence" capabilities for several years. While the company's Bard AI chatbot has started on a wrong note by answering a query about the James Webb Space Telescope wrongly during a promo event, this is in no way the end of Alphabet in the generative AI space. In fact, even the much-beloved ChatGPT has been known to give wrong or improper answers to users.
Furthermore, it will most likely take a long time for the artificial intelligence-powered Bing to overthrow Google's position in the search-engine space, considering that Microsoft needs to sort out challenges related to high computational costs and monetization for the new Bing.
Google Cloud, another major growth driver, accounted for an 11% share of the $217 billion cloud-infrastructure services market at the end of September 2022. The segment reported a 37% year-over-year jump in revenues to $26.3 billion in fiscal 2022, which is slower than the 40%+ growth rates seen in the previous quarters. This was mainly due to enterprises scaling back spending on cloud infrastructure. Furthermore, the company has now shifted its focus for Google Cloud from top-line growth to cost optimization and profitability.
Considering these growth drivers, Alphabet may prove to be an attractive pick now.
