Over the past year, rising interest rates and fears of a global recession drove many investors away from higher-growth tech stocks. However, dumping all of your tech stocks simply because a recession might be lurking around the corner doesn't make much sense -- especially when some tech companies were built to withstand tough economic downturns.
Here, I'll highlight three of those recession-resistant plays -- Veeva Systems (VEEV -0.71%), Fortinet (FTNT -2.17%), and Airbnb (ABNB 0.10%) -- and explain why they're still great buys as the bear market drags on.
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1. Veeva Systems
Veeva Systems is the top provider of cloud-based customer relationship management (CRM) services for life science companies. It serves over 1,200 companies -- including Pfizer, Johnson & Johnson, and Moderna -- and it enables those clients to track their sales efforts, store and analyze their data, and track clinical trials and industry regulations.
Veeva's core customers are well insulated from a recession because economic downturns generally have a limited impact on most drug sales. Recessions might force drugmakers to downsize their sales teams or postpone big R&D projects, but they'll likely remain tethered to Veeva's cloud-based services if they want to stay competitive in the saturated life sciences market.
Veeva's revenue rose 26% in fiscal 2022, which ended this January, as its adjusted EPS increased 27%. For fiscal 2023, analysts expect its revenue and adjusted EPS to grow 16% and 11%, respectively, even as it grapples with slower R&D spending across the life sciences market.
Veeva's slowdown rattled some investors this year, but I believe it's still reasonably valued at 40 times forward earnings. This is a company that dominates a high-growth niche of the CRM market, still has plenty of pricing power, and will continue to profit from the long-term expansion and digitization of the life sciences market.
2. Fortinet
Fortinet is a cybersecurity leader that serves more than half a million customers worldwide, including most of the Fortune 500. Two decades ago, it launched a next-gen firewall called FortiGate. That firewall became the heart of its Security Fabric, which now provides end-to-end protection services for on-premises, cloud-based, and Internet of Things (IoT) devices.
Cybersecurity companies are usually well insulated from recessions because most companies won't lower their digital defenses to save a few dollars. They might struggle to secure new deals throughout the downturn, but they should remain more resilient than less mission-critical software companies.
Fortinet's revenue and adjusted EPS increased 29% and 19%, respectively, in 2021. For 2022, it expects its revenue to rise 32% to 33% -- even after it suspended its operations in Russia -- and for its adjusted EPS to grow 42% to 44% (after factoring in its 5-for-1 stock split this year).
Unlike many other high-growth cybersecurity companies, Fortinet is firmly profitable by both GAAP (generally accepted accounting principles) and non-GAAP measures -- which could make it an even more appealing investment as interest rates continue to rise. Its forward price-to-earnings ratio of 38 also looks very reasonable relative to its near-term growth.
3. Airbnb
Airbnb disrupted traditional hotels by letting anyone rent out their own properties. It suffered a slowdown during the pandemic as global travel ground to a halt, but it recovered quickly as the lockdown measures ended. Although travel and tourism are macro-sensitive sectors, Airbnb's business model should remain resilient during a recession for three reasons.
First, budget-conscious travelers will gravitate toward cheaper Airbnb rentals instead of pricier hotels. Second, hosts will likely be more motivated to rent out their properties to generate more passive income. Lastly, it's a digital platform that doesn't own any real estate on its own -- so it won't need to take on massive amounts of debt to buy new properties.
Airbnb's revenue plunged 30% in 2020, but it surged 77% in 2021 as the pandemic-related headwinds dissipated. Analysts expect its revenue to rise 39% to $8.4 billion this year as it laps its post-pandemic recovery. Airbnb also turned profitable on a GAAP basis in the first nine months of 2022, and it will likely stay in the black for the full year.
Airbnb's stock trades at 32 times forward earnings, which is a reasonable valuation for a recession-resistant company that dominates its high-growth niche. Those strengths make it a solid stock to own during an economic downturn.
