Growth investing holds the promise of attractive capital gains as companies increase their revenue and net profits.
When searching for suitable growth stocks, it’s useful to go through a list of questions on whether the growth will be sustainable.
One method of filtering out good growth stocks is to see if the business is latching on to tailwinds that can stretch over years or even decades.
These tailwinds provide the company with ample growth opportunities by increasing its total addressable market (TAM) and allowing it to scale to capture more customers.
And as customers increase their spending over time, these stocks will also benefit as they report higher revenue, profits and cash flow.
Zscaler (NASDAQ: ZS)
Founded in 2007, Zscaler is a leader in cybersecurity and operates the world’s largest in-line security cloud platform.
The company has grown impressively over the years.
Revenue surged from US$190 million in fiscal 2018 (FY2018 ending 31 July) to US$1.1 billion in FY2022, for a compound annual growth rate (CAGR) of 55%.
Zscaler also generated a free cash flow of US$231.3 million for FY2022, up 61% year on year from FY2021’s US$143.7 million.
Free cash flow margin (i.e. free cash flow as a percentage of revenue) stood at 21%.
The company enjoyed annual recurring revenue (ARR) of more than US$1 billion and has a dollar-based net retention rate higher than 125% for FY2022.
Zscaler’s customers are also spending more on its platform.
Customers with an ARR of US$100,000 or more increased from 1,480 in FY2021 to 2,089 in FY2022.
The cybersecurity specialist is poised for more business in the future as digital transformation takes root and online security remains a top priority for many companies’ boards of directors.
Long-term tailwinds also include the shift to cloud computing, the continued development of the Internet of Things, and rising security threats due to the rising number of devices connected online.
The good news is that annual billings have jumped 59% year on year to US$1.48 billion for FY2022.
Zscaler also sees a serviceable addressable market (SAM) of US$72 billion as it focuses on organisations with more than 2,000 employees.
With the advent of 5G connectivity and edge computing, the company’s services will be more in demand than ever and could see its SAM growing steadily over the years.
Snowflake (NYSE: SNOW)
Snowflake performs a useful function for today’s connected businesses.
It allows its clients to tap into its data cloud platform to access shared data and to conduct analysis to derive insights.
Through Snowflake’s platform, companies can receive data across multiple cloud systems and geographies, thereby improving their efficiency and allowing them to run more effective analytics.
The company boasts reputable partners such as Microsoft (NASDAQ: MSFT), Accenture (NYSE: ACN) and S&P Global Inc (NYSE: SPGI).
Snowflake’s fiscal 2023’s first half (1H2023) ending 31 July saw revenue soar 83.5% year on year to US$919.6 million.
Free cash flow also clocked in at US$225.5 million for the period.
The company saw total customers climb 36% year on year to 6,808 and boasted an impressive net revenue retention rate of 171%.
Snowflake sees a significant market opportunity for it to grow, with a projected FY2026 TAM of US$248 billion.
The data silo specialist has an ambitious target to hit US$10 billion in product revenue by FY2029.
Okta (NASDAQ: OKTA)
With Snowflake providing data insights and Zscaler supplying the cybersecurity infrastructure, it’s time for Okta to provide yet another essential service: identity management.
Large corporations rely on Okta to manage access privileges for their staff and the company’s platform helps its clients to enable secure and quick access to a variety of applications.
The company saw revenue for its 1H2022 jump 53.4% year on year to US$833.3 million.
Total customers rose 26% year on year to 16,400 in the second quarter of the fiscal year (2Q2022), and has nearly doubled in a little over two years.
Importantly, customers with an annual contract value exceeding US$100,000 rose 35% year on year to 3,525, showcasing the increasing spending by Okta’s customers for its services.
The company’s trailing 12-month dollar-based net retention rate has also hovered around 122% over the last 10 quarters, demonstrating its resilience in the face of the pandemic.
Okta estimates that it has a TAM of around US$80 billion, affording it many more years of growth as demand stays strong for digital identity management.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.