Amazon and NVIDIA should continue to be recession-resistant.
This article originally appears on The Motley Fool, written by Beth McKenna.
If you have a job or a steady income from other sources, it can be easy to sometimes forget the United States is in a recession. After all, you have money coming in and the S&P 500 index has largely, though not entirely, recovered from its steep drop that began in mid-February triggered by the worldwide spread of COVID-19. (In 2020, the S&P 500 has returned 0.9% through July 17.)
It’s not wise, however, to bury your head in the sand to some hard facts. In the last couple of months, the U.S. unemployment rate has been higher than at any time since the Great Depression and the COVID-19 pandemic is worsening in this country. This is extremely troubling from several aspects, including an economic one.
Another stock market drop is entirely possible, if not likely, in my opinion. This does not mean that long-term investors should stop investing in the market. It’s well-established the stock market is the best passive way to grow wealth over the long term. It does mean, however, you should be particularly selective.
One class of stocks that investors should currently favor are the stocks of larger and profitable companies in the broad technology realm. Two top companies in this sphere that should continue to thrive even if the economic environment worsens are e-commerce and cloud computing giant Amazon.com and graphics processing unit (GPU) leader NVIDIA.
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Amazon a tech stock? The company generates more of its profits from its cloud computing service, Amazon Web Services, the market leader in the public cloud space, than it does from its e-commerce business. So, its stock is arguably at least as much a tech stock as a consumer goods stock.
Amazon is quite diversified, so buying its stock is kind of akin to buying a basket of stocks — perhaps large e-commerce and cloud computing service stocks, and smaller stocks focused on smart-home tech, grocery retailing, healthcare, digital advertising, and more. This diversification should continue to enable the company to weather — and even thrive during — tough economic climates.
In 2020, Amazon’s e-commerce revenue is getting a notable boost from the COVID-19 crisis because people worldwide have flocked to online shopping. Existing online shoppers have increased the amount of shopping they do online, while folks who have never shopped online have begun doing so. This acceleration in the shift from shopping at brick-and-mortar stores to online should prove to be a lasting one, in my opinion.
Wall Street expects Amazon to grow earnings at an average annual rate of 34% over the next five years. The company has a good track record of beating analysts’ earnings expectations, and there’s no reason to believe it won’t continue to do so.
NVIDIA is also solidly diversified, and has both consumer- and enterprise-focused businesses. In the consumer realm, it’s the market leader in discrete GPUs used to make graphics cards for desktop computer gaming. In fiscal Q1 2021, its gaming platform accounted for about 44% of its total revenue. Computer gaming is a worldwide growth market, thanks largely to the explosion in popularity of esports and the improving quality of video games.
Many hard-core or semi-hard-core gamers won’t easily give up spending money on their favorite hobby. So, this market is likely to prove more resilient to economic downturns than most consumer discretionary markets.
In fiscal Q2, gaming is poised to be dethroned as the company’s largest platform by revenue. NVIDIA’s acquisition of networking specialist Mellanox Technologies, which closed on the first day of fiscal Q2, should result in its data center platform becoming its largest platform. In fiscal Q1, this business accounted for 37% of the company’s total revenue.
Data center has been NVIDIA’s fastest growing platform in recent years. Growth is being driven by the widespread shift to cloud computing and the rapid adoption of artificial intelligence (AI) by entities of all sizes. Spending on AI isn’t likely to let up, even if the economy worsens. Investing in AI capabilities is a must for most types of companies if they want to remain competitive. This is more true now than ever, as the pandemic has accelerated the shift toward doing many things remotely — such as working, shopping, and “visiting” a healthcare provider. AI capabilities are needed to enable many remote services and functions.
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