It’s impossible to predict when a recession will strike the economy. These downturns are a regular part of the economic cycle, though, and they occur every four or five years (on average).
Tech stocks tend to be among the hardest hit when fears rise about a potential recession ahead. Good reasons for this slump include worries about growth slowdowns and cash crunches. Tech giants tend to be in industries that are highly sensitive to shifting economic growth rates. And many of these businesses choose not to pay dividends, which are prized when markets are volatile and declining.
But recessions don’t last forever, which means these downturns can provide excellent buying opportunities for investors seeking value. With that goal in mind, let’s look at two tech stocks that can thrive during recessions while maintaining attractive long-term growth outlooks. Read on for some good reasons to add Microsoft (NASDAQ: MSFT) and Palo Alto Networks (NASDAQ: PANW) stocks to your recession watchlist.
Parts of Microsoft’s product portfolio have been in a cyclical decline over the past year, but its diverse business proved that it can take those hits in stride. Revenue last quarter rose 10% year over year after accounting for currency exchange rate shifts, despite slumping demand for PCs and most consumer tech devices. Microsoft offset these challenges with soaring growth in its cloud and enterprise services, anchored by the popular Azure platform.
Investors will have trouble finding a more financially impressive business. Microsoft routinely turns more than 40% of its sales into operating profit, for example. That key metric jumped a blazing 21% in the quarter that ended in late June. Microsoft also pays a modest, but quickly growing, dividend.
The stock can’t be called cheap at a price-to-sales ratio of nearly 12. But a recession, or increased fears about one, could reduce that valuation. In either case, keep Microsoft on your short list of stocks to buy during a downturn.
Palo Alto Networks’ business is generating some impressive growth and earnings metrics right now. The cybersecurity specialist is targeting sales gains of nearly 20% this year, following a 23% spike last year. Operating profit margin improved significantly this past year as well, and management is intent on boosting that figure over time. The software-as-a-service provider generates a mountain of cash, too, with free cash flow on pace to represent nearly 40% of sales in fiscal 2024.
The stock price is the main issue with this high-performing business. Palo Alto Networks shares are valued at about 12 times annual sales today, up from around 8 at the start of the year. A recession is likely to push that valuation lower, providing a better entry point for long-term investors. But a mild cyclical slump might not harm its business by much. Enterprises tend to prioritize spending on security even as they cut back in more discretionary IT niches.
Palo Alto stock might still deliver solid returns for patient shareholders who buy the stock at current prices. Accelerating sales growth, combined with rising profitability, could power significant gains in the company’s annual earnings potential.
If you’re willing to wait, though, consider watching Palo Alto Networks for a chance at a cheaper price once the next spike of recession worries hit Wall Street. While other investors sell in fear at these times, you can focus on picking up impressive growth stocks like this at an attractive discount.
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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Palo Alto Networks. The Motley Fool has a disclosure policy.
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