Investing has long been a game of risk versus reward, where every decision should consider the two. Treasury bonds are as close to a risk-free investment as there is, and even those are subject to inflation and interest-rate risks. There are some exceptions, but the risk-reward trade-off generally holds up.
Growth stocks are notable examples of this trade-off. There are risks because many are younger and operating in evolving markets. However, when it goes as planned, they can provide substantial returns. Here are two companies in particular that are facing a lot of risk but can provide great value in the long run.
1. Snowflake
Snowflake (SNOW) is a data warehousing platform that has made it easier for companies to store, access, and analyze tons of data. Companies often use different systems for their accounting, customer relations, and in-house tools, but Snowflake allows companies to integrate and manage this data on one platform.
Snowflake has been one of the more talked-about growth stocks in the past few years, but that hasn’t quite translated to stock price success. Despite its surge in 2023 (up 42%), Snowflake is still down over 50% from its November 2021 peak and below where it began trading during its initial public offering.
One of the main concerns with Snowflake is the slowdown in its growth. In the third quarter of its 2024 fiscal year (ended Oct. 31), it made $734.2 million in revenue, up 32% year over year (YOY). Generally, 32% YOY revenue growth is a good thing, but Snowflake’s YOY quarterly revenue growth is consistently dropping.
There’s also the issue of Snowflake’s expenses growing faster than its revenue. In Q3, its operating expenses were $765.8 million, up 34% YOY. Snowflake isn’t yet profitable, and having expenses grow faster than revenue isn’t quite the way to get there.
That said, Snowflake is operating in an industry that I believe is still in the relatively early parts of what it can be: big data. Big data has been a buzzword in the tech world for quite some time, but it’s becoming increasingly important as data-driven decision making and AI training have come to the forefront.
Snowflake’s 135% retention rate and growing list of big-name customers suggest its tools are effective. As it continues to expand its product ecosystem and leverage its machine learning and AI capabilities for data analytics, it has the potential to be a long-term success.
2. DraftKings
As we’re going through a time of year when U.S. sports are in a peak season, I’m sure you can’t help but notice the amount of sports gambling content that’s been around. As states slowly legalize sports gambling, it has become a billion-dollar industry, benefiting companies like DraftKings (DKNG).
The sports betting market is becoming fairly competitive as platforms like DraftKings, FanDuel, PrizePicks, Underdog Fantasy, the now-emerging ESPN BET, and countless others seek to get a piece of the growing sports gambling market.
In Q3 2023, DraftKings beat revenue and earnings per share expectations at $790 million and -$0.61, respectively. Both were up significantly YOY, causing management to increase its 2023 revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance, as well as 2024’s. DraftKings expects its 2024 revenue to be $4.5 billion to $4.8 billion, with an adjusted EBITDA of $350 million to $450 million.
DraftKings’ stock price surge in 2023 (up 230%) and aggressive 2024 guidance puts investors at risk of overvaluing the stock if it doesn’t deliver on its goals. It seems to be on the path to continued growth, but increased competition could damper DraftKings’ ambitious plans.
My biggest concern is the emergence of ESPN BET — an app and partnership between Walt Disney‘s ESPN and Penn Entertainment. As of Dec. 12, 2023, ESPN BET is the top free sports app in the App Store, while DraftKings is fourth. ESPN’s name and media reach could draw consumers toward it and away from other options.
Nevertheless, if the U.S. sports gambling pie grows as much as anticipated, it could be enough business to go around and fuel the growth of multiple companies. The U.S. online sports betting market is projected to have a compound annual growth rate of 15.6% from 2023 to 2030.
Ease your way into a stake
Considering the risks, yet upside, that face Snowflake and DraftKings, I think long-term investors should consider dollar-cost averaging their way into a stake. Dollar-cost averaging can help reduce the risk of volatility and make sure you don’t invest a lump sum right before a market drop, correction, or any similar event.
Investors with a short timeline may want to avoid these stocks because of the near-term uncertainty. Even if you decide to invest in these stocks, ensure they don’t account for too much of your stock portfolio. You’ll want more stable companies leading the way.
— Stefon Walters
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Source: The Motley Fool