If you believe the headlines, fear is mounting that the COVID-19 coronavirus outbreak and the oil price war will send the global economy into a recession. At this point, though, it's way too early to be talking about a coronavirus-related recession. Even so, recessions are part of the economic ebb and flow, so it would be normal to expect one at some point.
If you're looking for recession-ready stocks, then consider Axon Enterprise (AXON 13.76%), Arista Networks (ANET 0.46%), and Pinterest (PINS 0.11%). All three operate businesses that could still thrive during a recession and have pristine balance sheets to weather a prolonged storm. Let's examine them a bit more than understand why investing in these companies might serve an investor well during a potential recession.
1. Axon Enterprise: The leader in law enforcement technology
Axon Enterprise provides technology solutions to law enforcement agencies around the world. It's most famous product is the Taser, a nonlethal firearm. But the company also has cameras to provide video evidence of incidents, protecting both law enforcement agents and civilians from false accusations. And it provides convenient software solutions to store electronic evidence and generate reports. These high-demand products drove Axon's 2019 revenue up 26% to $531 million.
Axon is recession ready because law enforcement isn't cyclical. Sure, governing bodies can slash budgets during hard times. But unfortunately, crime doesn't take a break, so demand isn't going to decrease. Besides that, consider how important recurring revenue is for Axon. In 2019, 71% of revenue came from recurring contracts, making it likely that its customers will stick around in the future.
And in a worst-case scenario, Axon has the means to endure a lean season. It carries zero debt on its balance sheet, and it has $350 million at its disposal between cash, cash equivalents, and short-term investments. And over the last 12 months, the company strengthened its balance sheet with $49.3 million in free cash flow.
2. Arista Networks: Making the cloud work
Arista Networks is a cloud-network infrastructure company, supplying bones and brains to public cloud providers like Facebook. By offering a great service that plays nice with other companies' products, little Arista has punched above its weight class and stolen market share aware from competitor Cisco.
Arista's stock has plummeted 43% from 52-week highs because investors weren't pleased with a change in guidance. The shift from 100-gig switches to 400-gig switches was supposed to drive revenue this year, but it said customers are shifting some spending from 2020 to 2021. Now, 400-gig switches will just have a small impact on Arista's revenue in the second half of 2020 before ramping up next year.
It should be noted that these switches get updated over time for speed and power efficiency. Therefore, Arista's customers continually upgrade, whether or not there's a recession, to keep technology current. So Arista and its competitors have that going for them. But the company is particularly compelling because, according to CEO Jayshree Ullal, it's No. 1 in the industry when it comes to 100-gig switches, meaning it's likely to hold on to that position through the shift to 400-gig.
The company's balance sheet is stellar, with over $2.7 billion in cash and marketable securities and no long-term debt. Assuming the worst -- if, for some reason, the public-cloud giants stopped spending -- Arista would still need to spend to update its technology hardware. But this cash-rich company has the means to do so.
3. Pinterest: The positive-vibe social network
Pinterest is a social network. It ended 2019 with over 335 million active monthly users, up 26% year over year. But that's just a fraction of the user base of Facebook or Twitter. So how does a smaller player like Pinterest distinguish itself from the crowd? The company commissioned a survey and found that 90% of its users believe its platform is a place for positivity. Only 26% of Pinterest users said the same for other social media platforms.
Since it is free to use, there's no reason why a recession would lead to a decline in users. If anything, recessions are filled with negative news, and users could increase time on the platform to get that added boost of Pinterest positivity. A growing user base coupled with increased usage would present a compelling audience to advertisers, which continue spending even during a recession. And there are a lot of opportunities to grow its average revenue per user through ad revenue since it's currently one of the most under-monetized platforms out there.
Right now, Pinterest holds around $1.7 billion in cash and marketable securities and has no long-term debt. Granted, $1.5 billion came from the proceeds of its IPO and a secondary offering. Stock-based compensation of $1.3 billion in 2019 means this company still operates at a net loss and needed the cash boost from these offerings. Even so, the balance sheet can support it, and with shares trading below its IPO price, now is a good time to buy this recession-ready stock.