Well over a year of a brutal bear market has investors feeling leery -- especially tech stock investors. The U.S. Federal Reserve's aggressive interest rate hikes, compounded by growing fears of a recession, have many sitting on the sidelines rather than putting money to work while stocks are depressed.
Being cautious isn't a bad thing in this environment, though. Indeed, buying beaten-up stocks indiscriminately can lead to disaster, given that many companies have been exposed as being less than ready for hardship. However, three Fool.com contributors think Amazon (AMZN -1.65%), The Trade Desk (TTD -0.54%), and Twilio (TWLO -1.59%) are built to survive a recession and thrive on the other side of it. Here's why.
Despite a slowdown in 2022, Amazon has lots of growth ahead of it
Billy Duberstein (Amazon): Sure, Amazon is one of the largest and most well-known stocks in the world, but in this investor's eyes, it's still somewhat misunderstood.
The company has a reputation as a profligate spender, even fundamentally "unprofitable" to some. But those who have been following the company for a long time knows the lack of near-term earnings is probably by design.
Yes, the company overspent in the near term during the pandemic to serve customers with e-commerce services, but the company is firmly in cost-cutting mode now that high interest rates and a return to stores have put a lid on near-term growth. Amazon's trailing 12-month free cash flow losses have improved in each of the third and fourth quarters of 2022 after bottoming in the second.
If you equate the current moment to the dot-com bubble bursting in 2000, Amazon actually went through similar trials back then, but came out stronger. In fact, after that downturn, Amazon decided to slow down, streamline costs, and become profitable. The effort culminated in 2004, when Amazon achieved an operating margin of 6.4%. And keep in mind, that was before the profitable Amazon Web Services was commercially available.
Assuming that's the underlying margin of the non-AWS business right now, Amazon's non-AWS operating income would have been about $28 billion in 2022, rather than the $10.5 billion loss it recorded.
The difference, yes, came from some overbuilding and overhiring, but also from investments in new businesses. For instance, Amazon just unveiled its first commercially available satellite internet receivers for consumers under what it's calling Project Kuiper. In the news release, Amazon said it will begin mass-producing satellites later this year, with a prospective launch date in early 2024 and customer availability later in 2024. If Project Kuiper becomes a success, that's another potentially big business for the e-commerce and cloud giant.
Finally, while some are fretting about the current slowdown in AWS, I would lean toward the current deceleration as being temporary. For instance, while fourth-quarter AWS revenue slowed to 20%, down from 40% last year, revenue can fluctuate with customer usage, and just about every business in the world is currently streamlining and cutting spending. However, AWS's remaining performance obligations, or future revenue booked under long-term contracts, stood at $110.4 billion, 37.3% higher than the total at the end of 2021. Meanwhile, AWS is highly profitable, earning nearly $23 billion in operating income last year.
In times of economic stress, customers will likely continue to buy essentials on Amazon, especially if they're Prime subscribers. Meanwhile, cost savings and efficiency are among the main reasons to transition to the cloud. So Amazon shouldn't have a problem making it through a potential recession, with lots of growth prospects once we're on the other side.
Rocking the boat in online advertising
Anders Bylund (The Trade Desk): Digital marketing expert The Trade Desk is like a digital DJ, spinning ads and getting the party started for companies across various channels and devices. The company uses a deep and rich data store to mix and match the right audiences for the right ad buyers, while its real-time bidding tools make sure the marketing beats keep flowing. In short, The Trade Desk is the ultimate booster for the online advertising industry.
And the party keeps going even in a gloomy market. Actually, I would argue that clients need this company's services more than ever when the ad budget belts are tight. Anything that helps them deliver better sales-boosting results per ad dollar is worth its weight in gold at times like these.
You can see this quality in The Trade Desk's financial reports. Q4 2022 revenue reached a record $491 million, a year-over-year increase of 24%. Even more impressively, the company's revenue for 2022 as a whole grew 32% year over year to $1.578 billion. Remember, that's amid an economywide inflation crunch and an even deeper downturn in the online advertising sector.
It seems as if The Trade Desk is not just keeping up with the trends, but often setting them. No wonder it's the popular kid in class, with advertisers flocking to it for their innovative and privacy-conscious approach to targeted advertising.
The Trade Desk's ability to not only survive but thrive during a perfect storm of down markets is a testament to its money-making strength and resilience. And while this stock may not be a bargain-bin find, the company is worth its premium price. For investors who want a tech stock with the ability to come out victorious after harsh economic challenges, The Trade Desk is definitely worth serious consideration.
This cloud communications story isn't just about growth anymore
Nicholas Rossolillo (Twilio): Make no mistake, Twilio has been an atrocious stock over the last couple of years. It was a top growth stock before 2020 and an early pandemic darling. However, as interest rates rose and investors began to more closely scrutinize growth rates coming out of the digital economy (in Twilio's case, cloud-based messaging and communications services), Twilio was found severely lacking in profitable growth. Though revenue is up well over 200% in the last trailing two-year period, free cash flow has been deeply in the red, coming in at -$335 million (on sales of $3.83 billion) in 2022.
Twilio's woes have been compounded by complaints of high employee stock-based compensation, in part coming from a string of acquisitions as well as management's liberal use of the noncash payroll feature to attract and retain talent. The company has taken steps to rein stock-based comp back in (including, unfortunately, mass layoffs), but it will take time to completely fix the problem.
Nevertheless, Twilio's efforts are beginning to produce some green shoots. On an adjusted basis (which will more closely follow free cash flow), Twilio has swung to profitability in recent quarters, and it expects to generate $250 million to $350 million in adjusted operating income in 2023. The company is also expected to be free-cash-flow positive this year.
And as for the stock-based comp that has been diluting shareholders, Twilio has a plan for that as well. As it approaches profitability, it will begin buying back stock this year. Management announced a $1 billion share repurchase plan through the end of 2024 that will at least partially (if not mostly) offset stock-based comp. Twilio can easily fund this program with its fortress balance sheet, which features nearly $4.2 billion in cash and short-term investments offset by debt of just $987 million.
Of course, this refocusing on profits comes at a cost. Because of it and because of macroeconomic headwinds, Q1 2023 revenue is expected to slow to a year-over-year increase of just 14% to 15% (down from 22% in Q4 2022). The days of Twilio's hypergrowth are over, at least for now. But Twilio is in good shape to survive a recession, and there's still a lot of promise for this top cloud software company in the decade ahead. I remain a buyer while the stock is down in the dumps.
