2022 has been an especially poor year for technology stocks. The Nasdaq-100, which tracks some of the largest publicly traded technology businesses worldwide, is down 27% year to date after going through a huge bull market over the last decade. The downturn is related to investor worries about rising interest rates, geopolitical tensions, ongoing supply chain issues, unfavorable foreign exchange rates, and many other factors that could hurt the profitability of these sectors in the short run. There is also the looming threat of a full-blown recession in the U.S. economy.
While these concerns may prove valid over the next few quarters, this downturn is likely to be more of a short-term issue. For long-term investors, that presents a fantastic buying opportunity on some stocks trading at a discount right now. Let's take a look at two great Nasdaq stocks that are worth a closer look at as the economy toys with a recession.
1. Amazon: More than just e-commerce sales
Amazon (AMZN -1.65%) is one of the largest businesses in the world -- dominating the e-commerce and cloud computing markets -- but took its lumps during a tough 2022. Shares are down nearly 41% so far this year, which trails all its relevant market and sector indexes. Investors are concerned about a lack of profitability (free cash flow went sharply negative over the last year or so) and a slowing e-commerce market.
A stagnating e-commerce industry is something investors should track, but Amazon's business is built on much more than just buying and selling things online. First, it has the dominant cloud computing division called Amazon Web Services (AWS). AWS grew its revenue by 34% over the last 12 months to $76.5 billion and generated $23 billion in operating income over that time frame. Cloud computing is projected to grow by 15% a year through 2030 and hit $1.55 trillion in annual spending. If AWS can retain its market share and keep generating strong margins, this business should be much larger three to five years from now.
AMZN Free Cash Flow data by YCharts
Second, Amazon's advertising business is scaling up rapidly. This segment grew 30% year over year on a constant currency basis last quarter to $9.5 billion and is now generating tens of billions in revenue a year. Amazon does not yet break out the profitability metrics for this segment yet, but given the strong margins of other digital advertising peers like Meta Platforms and Alphabet, it is likely this segment is a cash cow for Amazon.
Finally, Amazon's subscription business -- mostly driven by Amazon Prime -- continues to march higher. Last quarter, subscription services revenue hit $8.9 billion, up 14% year over year in constant currency, for an annual run rate of $35.6 billion. With delivery services that continue to improve Amazon's e-commerce customer value proposition, this subscription revenue should march higher in the coming years.
At a market cap of around $1 trillion, investors are getting incredible value in Amazon shares today, even if the e-commerce division struggles for the next few years.
2. Autodesk: Digitization of construction and infrastructure
Autodesk (ADSK 0.65%) has a simpler business than Amazon, operating purely in the software world. The company offers multiple software products that serve the architecture, engineering, and construction (AEC) markets, including its popular Revit and AutoCAD platforms.
The company benefits from the general growth of digitization and software usage when companies design buildings, factories, and other construction assets. For example, governments around the world are mandating that construction and architecture businesses use building information modeling (BIM) tools on building projects. Revit is the leading BIM software tool around the world and should benefit greatly from these mandates. Currently, the vast majority of countries are at less than 50% BIM penetration for construction projects, putting Autodesk in the driver's seat to grow Revit subscriptions for the foreseeable future.
There are also political tailwinds that should help Autodesk grow for the next decade, at least in North America and Europe. Governments like the United States are earmarking hundreds of billions of dollars to improve infrastructure and bring back manufacturing sectors like semiconductor manufacturing. The design, construction, and management of all this infrastructure will be done on Autodesk products, which should bring in more subscription revenue for the company.
This fiscal year, Autodesk expects to bring in $2 billion to $2.08 billion in free cash flow. At a market cap of $48.2 billion, that puts the stock at a price-to-free cash-flow (P/FCF) ratio of 24.1, which is only slightly above the market's average earnings multiple. The company is poised to consistently grow its earnings this decade, and I think now is a great time to pick up some shares of Autodesk.
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