3 Top Tech Stocks to Buy During a Recession

The key is “during” a recession — not before and certainly not long after.

This article originally appeared on The Motley Fool, by Nicholas Rossolillo

It was already a foregone conclusion, but it’s now official: The National Bureau of Economic Research officially declared on June 8 that the economy is in recession. It ends what was the longest period of expansion on record, lasting well over a decade from June 2009 until February 2020.  

Time to panic, right? Hardly! While the impact from the coronavirus-fueled contraction will be felt for years, markets are far more forward-looking than not. Though the after-effects of the Great Recession of 2008-09 were felt for many years, March 2009 was the low point for the S&P 500 (NYSEARCA:VOO), which called an end to the recession long before most started feeling better about the state of the economy.

And when it comes to investing, technology is one of the best places to deploy savings in the midst of a recession. After all, tech is all about making improvements and creating efficiency, and when the going gets tough, many organizations turn to tech to try and help tighten their belts and improve on legacy processes. Thus, while the market and the economy will be a wild ride this summer and beyond as the pandemic continues, I am buying tech while waiting for an eventual uptick in economic activity.

Three companies I think are buys right now are Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG), salesforce.com (NYSE:CRM), and Universal Display (NASDAQ:OLED).

1. Alphabet: Ads, cloud, and potentially billions in future innovation

There was ample worry about Alphabet at the onset of the coronavirus pandemic. In a recession, consumer spending tends to take a hit. As a result of the lower return on investment, many businesses reduce the portion of their budgets allocated to advertising. Since Alphabet still makes the lion’s share of its income from Google and YouTube ads, the going was expected to get tough for the internet giant.

But Q1 2020 earnings were far better than expected, and though the bulk of the pain is likely to come in Q2, Alphabet’s ad businesses have shown they are resilient machines and have been through recessions before. As CEO Sundar Pichai reminded everyone on the last quarterly earnings call, search-based ads are easy to turn off and back on again, and generate easy-to-measure return on investment. The dip in activity in late March and April was steep, but internet-based promotions are coming back fast.  

Plus, Alphabet isn’t just about ad revenue anymore. Google Cloud grew 52% at the start of the year, and the “other” business that includes YouTube TV subscriptions, the Google Play store, and Google hardware grew 23%. And then there’s the “other bets” segment — Alphabet’s portfolio of start-ups attempting to disrupt large industries. Even with those loss-generating investments dragging on results, the company overall remained highly profitable and generated $5.45 billion in positive free cash flow (revenue less cash operating and capital expenses) in Q1 2020.

When a real economic recovery gets rolling, I expect Alphabet to come back with a vengeance. And though search-based ads are still a big portion of this business, there’s a lot going on under the hood that should keep this tech titan in growth mode for a long time. 

2. Salesforce: A modern software staple

Speaking of the cloud, Salesforce has long been a pioneer of the cloud-computing movement. It’s long since grown beyond its core customer-relationship management-software specialty and these days is a software staple for organizations looking to bridge the gap between old operating systems and new — a trend often referred to as “digital transformation.”

Though currently carrying an enterprise value of over $150 billion, Salesforce still has big ambitions. It expects to achieve $20 billion in revenue this year for the first time, and though results are decelerating due to some of its customers tapping the brakes because of the recession, the outlook still implies 17% revenue growth over last year. For a company this large facing severe economic headwinds, that’s an impressive forecast.  

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Once the dust starts to settle, there is plenty of room for Salesforce to continue growing. Its recent deal with AT&T (NYSE:T) to help the telecom company transform its customer experience is one of Salesforce’s biggest deals ever and illustrates how much work is left to be done assisting organizations, as a new digital era dawns. And via internal development and a non-stop string of bolt-on software firm acquisitions over the years, Salesforce — along with rival Adobe (NASDAQ:ADBE) — lies at the heart of the whole digital transformation movement.

And as far as its ability to capitalize on an opportunity, Salesforce is in good shape. As of the end of April, there was $7.13 billion in cash and marketable securities net of debt on the balance sheet. The $1.54 billion in free cash flow generated in Q1 was good for a nearly 32% profit margin. In the decade ahead, I think Salesforce will continue its run of incredible growth and become one of the largest technology companies in the world.

3. Universal Display: New display tech goes mainstream

For pick No. 3, I’m going far smaller than Alphabet or Salesforce. Universal Display is a relatively unknown company and has an enterprise value of just $6.6 billion as of this writing. In the coming years, though, a big upgrade cycle in display technology could propel this business much higher.

Universal Display is a patent holder and seller of basic materials for OLED screens, which are thinner, use less power, and generally produce better images than the incumbent LED screen tech. OLED has made great strides during the last couple of years and is commonplace in the premium smartphone market. It has a growing list of manufacturers utilizing it for premium big-screen TVs. However, OLED still captures just a low single-digit percentage of the total display market. That’s changing fast, though, and total manufacturing capacity for OLEDs is expected to increase some 50% from the end of 2019 to the end of 2021.  

Of course, as with all things related to manufacturing, it will be an up-and-down ride going from point A to point B. This year is a prime example of that. Global recession could put a damper on consumer demand for high-end devices, and Universal Display’s stock is down 26% this year as of this writing. Even after the drop, it still trades for a hefty 50 times trailing 12-month free cash flow. The extra installed base of manufacturing capacity is expected to translate into big revenue gains for Universal Display, and those hopes are priced in.  

The move to next-gen display tech is going to take more than just a year or two, though, and Universal Display is well-positioned to benefit as that gradual change happens. Prices on OLED devices are falling as more manufacturers upgrade their old LED lines, which should help with consumer uptake. And the company had $640 million in cash and short-term investments on the books at the end of Q1 2020, good for nearly four years worth of operating expenses. As the effects of coronavirus wear off, this stock looks primed for further growth.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Nicholas Rossolillo and his clients own shares of Adobe Systems, Alphabet (C shares), AT&T, Salesforce.com, and Universal Display. The Motley Fool owns shares of and recommends Adobe Systems, Alphabet (A shares), Alphabet (C shares), Salesforce.com, and Universal Display. The Motley Fool has a disclosure policy.