Recessions, which tend to occur at least once every decade, can wreak havoc on high-growth tech stocks -- especially those that are pinned to macro-sensitive industries like advertising, fintech, and enterprise software.
However, there are also plenty of tech companies that either operate in recession-resistant industries or regularly mitigate the impact of economic downturns with consistent buybacks and dividends.
Today we'll take a look at three tech stocks that should be considered great investments during a global recession: Amazon (AMZN -8.43%), Palo Alto Networks (PANW -1.74%), and Texas Instruments (TXN -1.32%).
The average consumer's spending power weakens during a recession, which creates a fertile market for discount retailers. That's why Amazon's online marketplace, which undercuts many of its rival retailers, thrived during previous recessions. Its cloud infrastructure platform, Amazon Web Services (AWS), is also recession-resistant because companies need to keep their websites and apps online regardless of the macro headwinds.
As the global financial crisis unfolded more than a decade ago, Amazon's revenue rose 29% in 2008, 28% in 2009, and 40% in 2010. Last year, the COVID-19 crisis generated tailwinds for both its e-commerce and cloud businesses. Its total revenue rose 38% to $386 billion in 2020.
Amazon's revenue growth will decelerate this year as it faces tougher year-over-year comparisons in a post-pandemic market (although the pandemic is officially not yet over). However, it will continue to grow as it expands its Prime ecosystem, which topped 200 million subscribers earlier this year, and AWS, which claimed 32% of the cloud platform market in the third quarter of 2021, according to Canalys.
Those two growth engines make Amazon an evergreen growth stock that should easily outperform the broader market during a recession.
2. Palo Alto Networks
Cybersecurity companies are naturally resistant to recessions, since their clients need to maintain their digital defenses regardless of the economic challenges. In addition, economic downturns often spur an increase in cyberattacks from desperate individuals and groups of hackers.
However, cybersecurity stocks that are overvalued can still fare poorly during a recession as investors flock toward more conservative investments. Therefore, investors should buy cybersecurity stocks with reasonable valuations -- and not the hottest growth plays -- if a recession hits.
One stock that fits that description is Palo Alto Networks, which has already generated a near-12-bagger gain since its IPO in 2012. Palo Alto initially established a reputation as a market leader in on-site firewall appliances, then gradually expanded its portfolio of cloud-based security services and AI-powered threat detection services with big acquisitions.
Today, Palo Alto is a well-diversified cybersecurity giant that generates stable growth. Its revenue rose 18% in fiscal 2020 (which ended in July), even as the pandemic spread, and grew 25% in fiscal 2021.
In fiscal 2022, it expects its revenue to grow another 24%-25%, and for its adjusted net earnings to increase 16%-18%. But the stock still trades at less than eight times next year's sales -- which makes it fairly cheap relative to other high-growth tech stocks in this frothy market.
3. Texas Instruments
Texas Instruments might seem vulnerable to a recession, since the chipmaker's auto, industrial, communication infrastructure, and consumer electronics markets are all heavily exposed to macro headwinds.
However, TI sells analog and embedded chips, which are less capital-intensive to manufacture than higher-end chips. That low-cost model enabled TI to grow its free cash flow (FCF) per share at an average annual rate of 12% between 2004 and 2020, even as it endured the financial crisis and the COVID-19 crash.
TI returned most of that cash to its investors through buybacks and dividends. It reduced its share count by 46% between 2004 and 2020, and it raised its dividend annually for 18 straight years. It now pays a forward yield of 2.4%.
Those shareholder-friendly strategies locked in TI's investors, even as the company endured cyclical slowdowns in certain end markets. So if you had bought shares of TI 10 years ago, tuned out the noise, and reinvested your dividends, your investment would have generated a total return of nearly 700% -- compared to the S&P 500's total return of just over 350%.
We should never judge a stock based on its past performance alone, but I believe TI's business will remain strong -- and recession-resistant -- for the foreseeable future.