"Recession" is a scary word. Get ready, because the news media will plaster it in huge bold letters across the screen (probably with ominous music in the background, too) for this simple reason: Fear sells.
But investors need not panic. As Warren Buffett said, "The most important quality for an investor is temperament, not intellect." Levelheaded investors see these times as a brilliant opportunity to find great deals.
What is a recession, anyway? There isn't one definitive standard; however, most agree that two consecutive quarters of negative gross domestic product (GDP) growth constitutes a recession. It can be shallow, like the 1% GDP dip in 1990-1991, or deep, like the 9% decline during the worst of COVID-19.
Many see a shallow recession as the most likely outcome as the Federal Reserve wrestles with inflation. It's impossible to know what this means for stocks. Believe it or not, the market sometimes rises during a recession and usually bottoms before the recession ends. This is why gambling on timing the market is a losing proposition.
To win, look for terrific companies that will thrive long-term and create lasting wealth. Airbnb (ABNB 0.10%), Analog Devices (ADI 0.73%), and a little company called Amazon (AMZN -1.65%) each make a compelling, unique case for long-term success.
1. Airbnb is battle tested (and profitable)
If you are looking for a company that knows what it takes to make it through difficult times and emerge stronger, look no further than Airbnb. When travel came to a screeching halt during the COVID-19 pandemic, 2020 revenues fell 30% year over year (YOY), and the operating loss decreased to $3.6 billion. Management streamlined operations and made difficult choices. Airbnb had its first generally accepted accounting principles (GAAP) profitable year in 2022.
Revenues in 2022 came in 40% higher than 2021 and 75% higher than 2019 (the last full year before COVID-19), reaching $8.4 billion. Even better, Airbnb generated $3.4 billion in free cash flow (a fantastic 40% margin), which allowed the company to introduce a $2 billion share buyback program.
As good as 2022 was, 2023 could be even better. Statista estimates that 2023 travel spending will finally surpass pre-pandemic levels, as shown in the chart.
Airbnb has stayed lean, with staffing levels still below 2019 levels. The company introduced a more comprehensive host and guest protection policy called AirCover, as well as Airbnb apartment rentals for long-term guests. These initiatives and the company's efficient operations make Airbnb a stock with tremendous long-term potential.
2. Income investors love Analog Devices
Analog Devices (ADI) may not sound exciting, but it's one of the global leaders in analog semiconductors (or "chips"). These chips measure physical things like temperature, speed, or pressure and translate them to digital devices.
Significant markets for chips are manufacturing, medical, and automotive. After all, growth areas include sophisticated factories, high-tech medical devices, and automotive applications like self-driving, lane assist, and much more. You have almost certainly used several analog chips today, even if you aren't aware of it.
In fiscal year 2022, ADI received 72% of its revenue from industrial and automotive applications and hit $12 billion in sales on 64% growth. It did so all while generating $3.8 billion in free cash flow on a 31% margin. This success continued in Q1 fiscal 2023, with $3.3 billion in sales (up 21%) and $1.2 billion free cash flow (38% margin).
The company pledges to return 100% of free cash flow to shareholders through dividends and buybacks. The dividend has risen yearly since 2004 (even during the Great Recession) and yields about 2% currently. ADI is a terrific company for investors looking for a mix of dividend growth and capital appreciation.
3. Don't count out Amazon
Amazon has been put through the wringer since the pandemic. From clogged ports to labor costs to inflation, the company has seen it all.
The company's most profitable segment, Amazon Web Services (AWS), is seeing slowing growth. AWS grew just 16% in Q1 after growing more than 30% for years. But investors should take a lesson from management and focus on the future.
CEO Andy Jassy referenced long-term goals more than 10 times in the 2022 shareholder letter and stressed that Amazon is actively working with AWS customers to lower costs. This hurts Amazon's sales now, but will keep these customers with AWS for years to come. This "big-picture" focus by management should be applauded by Amazon's investors.
Amazon has secular tailwinds in artificial intelligence (AI), since AWS is the leading cloud servicing platform. In addition, Amazon Bedrock allows customers to generate original AI programs using existing base networks called foundational models (FMs). This is a terrific tool for companies without massive budgets that still want to use AI for text generation, image creation, or chatbots.
Q1 2023 results were encouraging. Sales rose 9%, net income turned positive, and operating cash flow increased. For all the hand-wringing, it's easy to forget that Amazon has more than 200 million Prime subscribers and a massive portion of the U.S. e-commerce market, and AWS is still the globe's leading cloud services provider.
Amazon stock is down 18% over the past year and is 45% off its all-time high. This could mean market-beating returns once the company battles through the current headwinds.
A potential recession is no reason for investors to lose heart. Instead, look for companies that will survive and thrive for years to come and dollar-cost average into a position to mitigate risks. These companies are a great place to start the journey to long-term profits, no matter the macroeconomic headwinds.
