Consider the market leader.
The U.S. technology sector was one of the biggest drivers of the decadelong bull market that finally ended earlier this year due to the health crisis. After a lull in the depths of March and April, tech returns are back to their old ways, up 33.4% in 2020 compared with a 7.6% gain by the overall S&P 500. Certain tech stocks that have high debt loads and negative cash flow may be at high risk during a recession, but others will likely continue to outperform. Here are nine tech stocks to buy in a recession.
Amazon.com (ticker: AMZN)
Although one might think e-commerce is an area prone to downturns, Amazon.com is in a league of its own. The company's power has only grown in the 2020 recession, as millions of Americans, unable or unwilling to buy in-store, shifted their purchases online. Amazon's broad market share, competitive pricing and fast delivery make it incredibly tough to compete with, and Amazon Web Services -- its cloud computing division -- is the dominant provider in its fast-growing, high-margin industry. In the second quarter of 2020, one of the toughest periods for American business in recent memory, AWS revenue rose 29% and the company posted 40% year-over-year sales growth. Analysts expect earnings to grow 36% annually over the next five years.
Cisco Systems (CSCO)
Cisco Systems is a data networking technology leader with products related to routing, switching and other services. Cisco essentially provides much of the infrastructure that makes the internet possible, but over the years, the company has increasingly embraced the recurring revenue model to help insulate it during cyclical downturns in hardware spending. Last quarter, for example, Cisco achieved its goal of deriving more than half of all revenue from software and services. The company's transition from hardware to high-margin software and services should continue going forward, but don't mistake Cisco for a high-growth company like Amazon. The reason Cisco is one of the best tech stocks to buy in a recession is its slow-but-steady nature, reasonable valuation and alluring 3.6% dividend. The consensus price target for Cisco shares is $48, implying roughly 20% upside.
Salesforce is one of the global leaders in on-demand customer relationship management services. Analyst Dan Romanoff says investors should focus on the highest-quality names with the largest competitive advantages in the software space during the downturn. He says Salesforce represents one of the best long-term growth opportunities for investors within the software group. In addition, investors shouldn't be spooked by revenue growth dropping below 20% over the next couple of years because Romanoff says margin expansion should help maintain much higher earnings growth rates. CRM stock has certainly proved to be resilient in the current recession, with shares up 58% in the calendar year. Salesforce is one of three new members in the Dow Jones Industrial Average in 2020, having replaced the blue-chip benchmark's oldest constituent, Exxon Mobil Corp. (XOM).
Facebook is a monopoly. Its firm grip on social media and messaging is apparent on its face: The company had 3.14 billion monthly active users last quarter on its family of services, which includes Facebook, Messenger, Instagram and WhatsApp. Despite uncertainty over consumer spending in the second quarter, advertisers have little choice but to hawk their wares on either Facebook or Alphabet's (GOOG, GOOGL) Google, with around 60% of digital advertising spending going to the two companies, according to estimates from eMarketer a year ago. Although FB sold off amid the chaos in March, it went on to reach new all-time highs, earning a spot as one of the best tech stocks to buy in a recession. Shares are now up nearly 30% year to date.
Like Amazon, Microsoft is one of the few companies in the world worth more than $1 trillion, with an eye-popping $1.6 trillion market cap. The company's ubiquitous software brings it massive cash flows of licensing revenue, and the decision to take Microsoft Office to the cloud and turn it into a recurring revenue subscription has millions of customers locked in and on the hook for regular subscription fees. Amid the pandemic, Microsoft's revenue rose 13% in the second quarter and adjusted earnings per share rose by 7%. While that's not blockbuster growth, it's consistent, and Microsoft even pays a very modest 1% dividend. Its Azure cloud computing division -- second only to AWS in market share -- is where the growth is, with revenue up 47% last quarter.
Verizon Communications (VZ)
Next among the best tech stocks to buy in a recession is Verizon, arguably one of the steadiest names on this list and the highest dividend-payer with a dividend yield of 4.3%. As the most valuable U.S. telecom provider, Verizon operates in a nearly impossible-to-penetrate oligopoly that includes AT&T (T) and T-Mobile (TMUS) in a distant third. Free cash flow in the first half of 2020 grew 73% from the year before to $13.7 billion. Verizon will be a beneficiary of the ongoing shift to 5G infrastructure as more and more connected devices come online. Its ownership of the 5G spectrum needed to facilitate the newer, faster networks ensures its toll-collecting business model will be around for decades to come.
Atlassian Corp. (TEAM)
Atlassian is one of those tech stocks that was built to thrive during the tumult of 2020. The company is behind popular workflow management software like JIRA and Confluence, as well as the collaboration software Trello. The dramatic surge in relevance of those products for millions of Americans working from home is driving top-line growth; revenue jumped 29% last quarter, and analysts expect revenue growth of about 20% in both fiscal 2021 and fiscal 2022. While the end of the pandemic, whenever that comes, may bring some customer churn, it's also likely that the rapid adoption of Atlassian's software will end up onboarding many new long-term customers. The sped-up adoption of Atlassian's products has contributed to TEAM stock soaring more than 70% in 2020.
It's no coincidence that so many of the best tech stocks to buy in a recession are "software as a service" companies: Investors love reliable, recurring revenue and services offered over the cloud, where margins can run higher and higher with each additional user. Adobe is a uniquely positioned creative software giant with a devoted user base and high switching costs for subscribers considering moving to a competitor. Its Creative Cloud subscription is a bundle of popular desktop and mobile apps including Photoshop, Adobe Premier, InDesign, Illustrator and more for $52.99 per month. Adobe set new revenue records last quarter and saw adjusted earnings per share growth of 25% year over year.
Match Group (MTCH)
Last up is Match Group, the online dating giant whose properties include several well-known dating apps, such as Match, Tinder, Hinge and Plenty of Fish, among others. Offered in more than 40 languages globally, Match's platforms dominate the growing online dating market, and Tinder in particular is the most-downloaded dating app globally and the top-grossing app globally. Last quarter, revenue rose 12% and year-to-date free cash flow surged 40%. Shares are up around 39% this year, as investors have applauded the steady growth -- even in a pandemic -- of a business built around people connecting in person. As the population ages, expect online dating to play a larger and larger role in dating and intimate social connections.
Best tech stocks to buy in a recession:
-- Amazon.com (AMZN)
-- Cisco Systems (CSCO)
-- Salesforce.com (CRM)
-- Facebook (FB)
-- Microsoft (MSFT)
-- Verizon Communications (VZ)
-- Atlassian Corp. (TEAM)
-- Adobe (ADBE)
-- Match Group (MTCH)