Do you know when the next recession will be? Of course not! Nobody does. But you can be reasonably sure that one will come at some point. That's why long-term investors should look for great businesses with the financial strength to endure through tough times.
Not sure what to look for? These three Motley Fool contributors are waving the flag for one stock from each of their personal holdings: Duolingo (DUOL 3.64%), Zscaler (ZS 1.28%), and Monday.com (MNDY 2.81%).
Read on to find out what makes each company a long-term winner these Fools feel comfortable holding through thick and thin.
Duolingo's excellent recent quarter shows why it's worth owning, recession or not
Jake Lerch (Duolingo): Should investors own growth stocks during a recession? Absolutely!
If you don't believe me, just consider how Netflix performed during the Great Recession. The company's stock nearly doubled between the onset of the recession in late 2007 and its close in mid-2009:
NFLX data by YCharts; shaded area represents the Great Recession.
There's a lesson here: Even hypergrowth stocks can survive and thrive through a recession; investors just need to buy and hold. That's why I plan on holding Duolingo even if a recession does strike.
The company, which operates a language-learning platform, already has impressive revenue growth. Sales accelerated to 44% in its most recent quarter (the three months ending on June 30), as user growth went through the roof.
Paid subscribers soared 59% year over year to 5.2 million. Monthly active users skyrocketed 50% to 74 million, and daily active users ballooned 62% to 21 million.
Similarly, other key financial metrics logged impressive gains. Total bookings (future sales not recognized as revenue until the company formally delivers a service) rose 41% to $138 million. Crucially, Duolingo recorded a positive net income of $3.7 million, showing any naysayers that the company can turn a profit.
For me, that excellent quarter demonstrates that the company remains a great investment -- similar to Netflix in 2007. So even if the economic weather turns ugly, I plan to batten down the hatches and ride out the storm with a solid hypergrowth stock: Duolingo.
In more challenging times, secure your assets in this cybersecurity stock
Will Healy (Zscaler): Indeed, the economy often influences tech stock performance, and in such times, recession resistance could be the key to protecting one's assets. If a downturn occurs, one of the safer high-growth stocks might be Zscaler, which specializes in cybersecurity for cloud applications, a service every cloud network needs in good times or bad.
The company further stands out with its leadership in zero-trust security. This approach assumes everyone is a potential threat. It then determines access based on factors such as devices, location, or company rank. And even when someone gains entry, it occurs on a limited basis, mitigating the potential damage if an attacker breaches security.
Certainly, cybersecurity is a competitive space, with CrowdStrike Holdings, Palo Alto Networks, Okta, and others competing for many of the same customers. But Grand View Research forecasts the cloud computing market will have a 14% compound annual growth rate through 2030, and other market researchers anticipate faster growth. This should drive heavy demand to secure these networks, increasing the chances that a rising tide will lift all boats.
That secular growth is likely occurring now, as revenue for the first nine months of fiscal 2023 (ended April 30) reached almost $1.2 billion, a 50% surge from the same period in fiscal 2022. Moreover, though the company lost $172 million in the first three quarters of fiscal 2023, that is an improvement over the $293 million lost over the same time in 2022.
That loss occurred in conjunction with a stock-based compensation expense of $323 million over the last nine months. Also, the $1.59 billion in revenue projected for fiscal 2023 is a 46% yearly increase, representing a slight growth slowdown if that projection holds.
Still, Zscaler's price-to-sales (P/S) ratio of 13 is not far above its all-time lows. And since rapid revenue growth could lower that sales multiple over time, it reduces the likelihood the stock will experience a substantial decline. Hence, as cloud adoption continues and customers look to protect their networks, it should bode well for the cybersecurity stock's investors regardless of the overall economy.
Monday.com is a work OS, which you don't easily get rid of
Justin Pope (Monday.com): What happens during tough times? Companies tighten their belts and look for places to cut costs; only the most important assets are safe. That should play nicely into Monday.com's hand when the next recession arrives.
Monday.com considers itself an operating system (OS) for work; it's a software platform that lets companies build custom dashboards for employees to collaborate and communicate.
One could argue that most companies will want to uproot the system they run their business on to save a few dollars, especially since Monday.com's pricing is largely based on how many people use it. Yet the company has a net revenue retention rate of 115%, signaling that customers typically spend more over time instead.
And to see just how resilient Monday.com can be in a recession, look at its financials. The business had operated at near break-even free cash flow since going public, and it began growing in 2023.
The company is at the point where revenue will grow faster than expenses, resulting in rapidly increasing cash flow. And Monday.com has zero debt and more than $900 million in cash if the business stumbles. In other words, there is a strong financial safety net shareholders can fall back on.
MNDY Free Cash Flow data by YCharts. TTM = trailing 12 months.
Meanwhile, Monday.com is still growing; analysts believe annual revenue growth will exceed 20% through the decade's end. This is no moon-shot stock that is as likely to fail as it is to succeed. Monday.com is a business firing on all cylinders, with impressive financial strength, and the stock should grow and protect your money over the coming years.
