Investors must be net stock accumulators, in good times and bad. When a recession hits, the stocks investors buy need great long-term potential, as well as a recession-proof business model. Just because the economy is in the tank doesn’t mean a sole proprietorship can’t be successful.
Two tech companies I would buy in a recession are CrowdStrike Holdings (NASDAQ:CRWD) and Autodesk (NASDAQ:ADSK). Both provide vital software, something that cannot be cut, no matter how bad the business is. During the last recession – caused by the pandemic – everyone ignored the challenge and continued to grow.
Cybersecurity is an area where no business can cut spending. A compromising attack when a business is already unlucky during a recession could be the end of the business. CrowdStrike endpoint security software protects network access points, such as a computer or phone. Its zero-trust approach can identify when users aren’t doing what they usually do. The response to prevent damage or theft of information is instantaneous, which advances the use case of CrowdStrike.
Unlike Autodesk, CrowdStrike is young enough to have never experienced a prolonged recession. Founded in 2011, the company has known nothing but good times. However, its CEO, George Kurtz, has experienced two recessions during his career.
In 1999, he created Foundstone, a company that advises its clients on security issues and has an incident response team. Foundstone was acquired by McAfee, another software security company, in 2004, demonstrating Kurtz’s ability to weather the dot-com recession of the 2000s. During the 2008 financial crisis, he was McAfee’s chief technology officer , which gave him another front-row seat in managing a challenging environment.
Although the company is not yet profitable, with the increase in revenue coupled with the importance of the software to customers, the company may soon reach profitability. While profitability is great, leadership is essential for any team during tough times, and Kurtz gives CrowdStrike an edge.
The stock is also a great investment right now; in its third quarter of fiscal 2022, annual recurring revenue (ARR) increased 67% to $1.5 billion and customer count increased 75% year-over-year former. The rapid adoption shows how crucial CrowdStrike’s products are, making it unlikely to be cut during a recession.
Construction and manufacturing slow during recessions. With Autodesk’s old business model, architecture and engineering firms could choose not to move to the next software model and wait for business to pick up.
Now, the subscription model generates revenue every year, unless a customer drops out of the software altogether. Autodesk’s software lineup includes Revit, AutoCAD, and Inventor, all of which are must-haves for their users. These programs create, modify and maintain designs and products and can never be abandoned; they need to be replaced – an expensive proposition unlikely to happen during a recession.
With the critical importance of the United States to the global economy when a recession hits the country, it will likely affect the entire world. However, each region will experience a different depth of recession. Autodesk’s revenue stream is diverse around the world and continues to grow.
|Autodesk Revenue Composition for Q3 2022|
|Region||Revenue sharing||Revenue increase|
|Europe, Middle East and Africa||38%||19%|
By being diversified, Autodesk can sustain growth during a national recession by leveraging other regions.
It’ll probably never grow as fast as CrowdStrike, but it’s solidly profitable. It converted 23% of its revenue into free cash flow during the third quarter and made a profit of 13%. Recurring revenue accounted for 97% of the total, marking the transition to annual software updates. Autodesk won’t set the world on fire, but it will deliver solid results.
Technology stocks to avoid
The COVID-19 recession did not last long. Still, it gave investors insight into how certain companies would perform under adverse conditions. A subset of technology companies that rely on advertising to generate revenue, such as The trading post (NASDAQ: TTD) and pinterest (NYSE: PINS)saw its revenue decline in the post-recession quarter (noted by the gray area).
The drop in the chart for quarterly year-over-year revenue growth around July 2020 showed what happens when companies cut their advertising budgets to deal with the difficulties of the pandemic. However, the subscription companies ignored it as if nothing had happened. During the protracted recession of the 2008 financial crisis, advertising spending fell by 13% across all media. When a recession hits, ad-based businesses will struggle.
Essential software is a great place to look for recession-proof stocks. Often the product is so ingrained in the general workflow that a business could not function without it. In addition, the software must be subject to a subscription schedule. Both Autodesk and CrowdStrike fit these descriptions, which also makes them excellent investments.
Even though these companies currently appear robust, when a recession hits, all bets are off. Still, these two are poised to succeed in good times and bad.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.