According to many market analysts, it's high time to prepare for a recession. That doesn't mean you should panic, sell all your stocks, and hunker down in a fallout shelter with three pallets of canned tuna. Instead, it's actually time to get excited about the upcoming opportunity to buy amazing tech stocks at once-in-a-decade discounts.
You see, the tech sector often takes a harder hit than the rest of the stock market when times are tough -- and that's true even for the cream of the crop, the best of the best, the top of the heap. Buying future winners on the cheap will set you up to make serious money when the economic crisis has passed.
Many of the big winners in the recovery will be brand new to us. Some are today's humble start-ups with big ideas that will work wonders in the next bull market. Others will be the top-notch tech giants we know today, resaddled to ride on in a whole new market environment. Certain companies in both categories are likely to take massive price cuts while the recessionary storm is blowing, only to soar much higher in the years and decades to come.
Below, I'll show you two tech stocks that belong on every smart investor's buy list as America barrels toward another recession. One is an established winner with the chops to survive and thrive in the coming crisis. The other may be unfamiliar to you today, but it looks like a household name of the post-recession future.
So let's dive in. But first, let me show you the ropes.
What is a recession, really?
A recession is a period of economic decline, usually defined as a decline in gross domestic product (GDP) for two or more consecutive quarters. Additionally, a recession typically comes with rising unemployment and falling stock prices.
America has seen three recessions since the turn of the millennium: the dot-com crash and 9-11 aftermath of 2001, the subprime mortgage meltdown in 2008, and the start of the COVID-19 pandemic in 2020. The current market may feel like a recession with surging inflation, plunging stock prices, and high federal interest rates. However, this economy doesn't technically fit the description of a classic recession, largely thanks to multiyear low unemployment numbers. The GDP is still going up:
U.S. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDP, January 11, 2023.
Still, many economic analysts expect a full-blown recession to rear its ugly head in 2023. The Federal Reserve's inflation-busting interest rate hikes will limit business and consumer spending, eventually putting a stop to the raging inflation but also to the GDP growth. Financial gurus may disagree on details such as the length and depth of the recession, but the Greek chorus broadly agrees that it's coming soon.
The usual suspect: Alphabet
The parent company of Google, known as Alphabet (GOOG 1.43%) (GOOGL 1.42%) since 2015, was made to change with the times. I mean that quite literally. The holding company called Alphabet officially replaced the Google brand in order to allow its various non-Google subsidiaries to operate independently and pursue their own unique goals. The reorganization was one of CFO Ruth Porat's first initiatives for this company after a long and distinguished career at financial services powerhouse Morgan Stanley. It was a pro move by a financial genius, setting the company up for many decades of growth in any economic environment.
The reason for this is simple: economies of scale and diversification.
Alphabet, with its vast resources and capital, can invest heavily in new technologies and ideas, exploring different markets and opportunities. The company had $22 billion of cash equivalents and $94 billion in easily liquidated, short-term investments as of Sept. 30, 2022. This gives it a competitive advantage over smaller companies that may not have the same level of financial resources. Alphabet can make bigger bets on new ideas than most of its competitors.
At the same time, it can also go after a wider variety of potentially profitable projects. One advantage leads to another! Diversification is the practice of spreading investments across different industries, sectors, and geographical regions. By having multiple operations in very different fields such as Google (online search and advertising), YouTube (digital video), and Waymo (self-driving cars and related services), Alphabet is able to reduce its overall risk and increase its chances of long-term success. If one of its divisions is not performing well, the others can compensate for the losses. For example, the online search business that made Alphabet the giant you see today may fall out of favor in another 10 or 20 years. By then, one or more of the other divisions should be ready to pick up the slack.
Alphabet's economies of scale and diversification make it well prepared to change with the times and to adapt to ever-changing economic conditions. We may eventually forget that Alphabet ever was synonymous with Google when its other arms take the operating baton and run miles ahead.
In my eyes, no other company is better prepared than Alphabet to take on absolutely whatever comes next. That's why I'm looking forward to a recession-based fire sale on Alphabet stock where I can grab bargain-priced shares of this long-term winner by the truckload.
You can thank Ruth Porat for this incredible flexibility -- all the way to the bank.
The dark horse: Fiverr
Freelance services reseller Fiverr International (FVRR -1.17%) may or may not ring a bell. The company was kind of a big deal during the widespread COVID-19 lockdowns of 2020, as millions of people suddenly had lots of spare time on their hands, and businesses needed to get work done remotely. Fiverr found plenty of new clients on both the buy side and sell side of the job-matching equation. Sales surged, and the stock skyrocketed.
But the rocket ride didn't last long. Fiverr's shares peaked on Feb. 12, 2021, looking back at a 1,100% return in 52 weeks. In other words, $1,000 invested in Fiverr one year earlier had ballooned into roughly $12,000:
It has been all downhill from there. With coronavirus vaccines readily available, lockdowns turned into a distant memory, and everyone forgot about doing freelance side gigs or moving their whole careers to Fiverr. This company would soon become a forgotten fad, at least in the minds of bearish investors. Today, Fiverr's shares trade more than 90% below the lofty highs of 2021.
Hold your horses, though.
Fiverr's growth didn't run into a brick wall, actually. Trailing sales stood at $190 million in February 2021. Now they're up to $334 million. Both revenues and free cash flows are up by 50% since that snapshot at the peak.
And I'm talking about cash profits here. Fiverr is building its cash reserves as we speak, while raking in larger and larger stacks of top-line revenues thanks to larger average spending per buyer and rising customer counts. As it turns out, only investors forgot about Fiverr. The actual business is not going away.
When the next recession hits, Fiverr's stock may take a bit of a dive as investors shy away from riskier growth stocks. But don't let that scare you. This company is shaking up the way we work and will continue to do so, recession or not. In fact, a recession is likely to accelerate the trend toward more flexible career options, leading to a spike in freelancer services and solidifying Fiverr's position as a leader in the gig economy. Plus, they're raking in cash profits even during an inflation-powered bear market. So a deep share-price dip will serve nicely as an even more generous buying window.
Bottom line: Fiverr is a future giant in the business services world, and it's smart to snag some shares on the cheap now or during the next recession. Either way, you're doing your stock portfolio a big favor.
