On September 16th, Snowflake (SNOW) went public. Management had initially planned an IPO price between $75 to $85, but in the end, it priced it at $120 per share. On the first day of trading, the price gained 113% and became the biggest software IPO of all time. Investors were enamored by the company’s growth story and potential. SNOW’s revenue grew 174% for the fiscal year that ended on January 31st.
While the stock is a great story, its current valuation, based on a price to sales ratio of 120.7, is way too high. The company will need to deliver insane growth to justify its current valuation. I believe there are other more established companies with better growth prospects trading at more reasonable prices. When I say “better growth,” I am referring to a higher potential for growth over the long term, not its current growth rate.
I believe NVIDIA (NVDA), Netflix (NFLX), and Newmont Goldcorp (NEM) offer more significant growth potential than SNOW. I chose these three stocks because they exhibit top growth potential in their industries and sectors based on earnings, operating income, dividends, and revenue. They also have low debt, strong profitability, and valuations on the lower side based on a forward price to earnings (P/E).
NVDA is the indisputable leader in the graphics processing units (GPUs) market. In fact, it had a commanding 80% market share in the second quarter. The chips are a favorite among gamers due to their ultra-realistic images that make you feel like you’re in the game. Aside from gaming, the company has also expanded its GPU usage to facilitate complex calculations, cloud computing, and artificial intelligence. That’s why I chose this stock. It has immense growth potential with these new end markets.
In the second quarter, revenue grew an astonishing 50% year over year. This was driven by a 167% increase in revenue from its data center, which includes cloud computing and artificial intelligence. NVDA recently introduced its new processor, the RTX 30, described as a game-changer. This new generation of graphics cards destroys the previous generation in terms of performance and price. As more people are building and upgrading computers due to the pandemic, NVDA is in a prime position to benefit. When the company launched its new RTX 3080 graphics card on September 17th, it sold out in seconds.
NVDA also recently reported that it would acquire mobile chip designer ARM Holdings. The combination of NVDA’s AI computing platform and ARM’s CPU ecosystem could make NVDA a dominant powerhouse in the artificial intelligence space.
NVDA is rated a “Buy” in our POWR Ratings system. It has a grade of “B” in every POWR component, including Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is also the #6 ranked stock in the Semiconductor & Wireless Chip industry. This stock has enormous upside due to its explosive growth prospects.
NFLX is the dominant force in the streaming space. Its streaming platform has the best catalog of series and films. This was the case before the pandemic, and it continues to be the case. The platform has become a staple in many homes during the pandemic as people stay at home in hopes of avoiding the virus. Its focus on movie and TV show originals has been a significant growth driver for its swelling subscriber base.
NFLX’s streaming service is now available in almost every country in the world except for China. The company made a bet on international expansion, and it has paid off and then some. Its focus on streaming regional content has been the primary driver of international growth. Its original local content is not only popular in some countries; it is some of the most popular content viewed in countries such as India, Korea, Japan, and the United Kingdom last year.
Its earnings for the second quarter were up a whopping 165%. Its earnings are expected to grow 42% next year and 35.3% over the next five years. Netflix is so popular that it could increase its subscription plan by a dollar or two, and most subscribers would be perfectly fine with that. That could generate an additional $500 million to $1 billion for the company.
As the coronavirus picks up steam heading into the fall and winter, people will continue to stay home, driving up the demand for streaming content. NFLX is in a strong position for tremendous growth due to more upside on global subscriber growth and increased streaming due to the pandemic and beyond.
Newmont Goldcorp (NEM)
Newmont is the world’s leading gold producer and a beneficiary of gold’s ascent for the foreseeable future. This stock is a pure growth play on the future of gold prices, which are flashing bright green right now. Gold is having its moment due to a number of factors including the pandemic, the federal response, and the current economic environment.
The SPDR Gold Shares ETF (GLD) is up 28% since March 19th. The yellow metal took off as investors looked for a safe place to park their money amid fears of the virus’s impact on the economy. But I believe the most significant factor of the rise in gold is the Fed’s very low interest rate policy. In a low-interest-rate climate, gold attracts buyers looking for a safe-haven asset. Interest rates are certainly low, and the Fed has pledged to keep interest rates near zero through 2022.
The rise in gold has surely benefited NEM, as its second-quarter earnings were up 167%. NEM’s stock is currently up 44.5%. Earnings are expected to grow 76.9% next year and an average of 36.5% over the next five years. After NEM merged with Goldcorp last year, it sold off non-core assets to become a more efficient company. This has resulted in its free cash flow closely tied to the price of gold. Strong cash flow should lead to dividend growth as well. I see gold holding strong as long as we stay in a low interest rate environment, which should propel NEM to new heights.
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SNOW shares were trading at $255.30 per share on Tuesday morning, up $4.89 (+1.95%). Year-to-date, SNOW has gained 0.54%, versus a 4.97% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More…