Many investors fear a recession is on the horizon, given soaring oil prices and rising geopolitical tensions. Some are deciding to stay away from equities, especially from tech stocks, a sector that doesn’t exactly have a reputation as a safe haven during economic downturns. However, there are attractive tech stocks that can perform relatively well even during challenging economic times and, more importantly, produce outstanding returns thereafter. Let’s consider two companies that have what it takes to pull that off: Microsoft (MSFT +0.03%) and Netflix (NFLX 0.60%).
Image source: Getty Images.
1. Microsoft
Microsoft has significantly lagged broader equities over the past six months. Although its financial results remain strong, the company’s massive capex spending is a significant concern for many investors, especially if a recession hits. However, as far as tech stocks go, Microsoft is a pretty good choice to hold during a recession. Here are three reasons why. First, some of the company’s services won’t suffer much in an economic downturn.
Microsoft’s productivity suite is entrenched in the day-to-day operations of millions of companies, and they can’t stop using it without risking business disruptions, even during a recession. The tech leader benefits from high switching costs in this niche. Second, Microsoft has an outstanding financial position. The company boasts the highest credit rating from S&P Global, a rare achievement that even the U.S. government currently doesn’t have.
Today’s Change
(0.03%) $0.11
Current Price
$370.28
Key Data Points
Market Cap
$2.7T
Day’s Range
$368.20 – $373.68
52wk Range
$344.79 – $555.45
Volume
1M
Avg Vol
37M
Gross Margin
68.59%
Dividend Yield
0.94%
Third, Microsoft has shown in the past that it can quickly pivot and cut spending if need be to preserve its margins when expenses rise and demand for some of its products and services cools off somewhat. These (and other) aspects of the business should allow it to navigate a recession fairly well. But there are also other reasons to invest in Microsoft, notably its leadership in cloud computing and artificial intelligence (AI). We could still be in the early innings of these massive growth opportunities that could grant the company important long-term tailwinds.
So, the stock might be declining right now, but it is well-positioned to weather whatever storm is coming and perform well long after. That’s why it is worth investing in the stock right now.
2. Netflix
People need to entertain themselves even during recessions. That’s where Netflix comes in. The company leads the streaming industry, which has now captured a significant share of television viewing time in some major markets like the U.S. Netflix offers several subscription options, including a low-priced ad-supported tier that starts at $8.99 per month and can help attract price-sensitive customers, especially during challenging economic times. Management has highlighted that the entertainment industry is fairly recession-resistant.
As Netflix’s co-CEO, Greg Peters, said last year:
We also take some comfort in the fact that entertainment historically has been pretty resilient in tougher economic times. Netflix specifically also has been generally quite resilient, and we have not seen any major impacts during those tougher times, albeit, of course, over a much shorter history.
Today’s Change
(-0.60%) $-0.58
Current Price
$95.57
Key Data Points
Market Cap
$406B
Day’s Range
$94.27 – $97.20
52wk Range
$75.01 – $134.12
Volume
1.1M
Avg Vol
50M
Gross Margin
48.59%
Now, that doesn’t mean there will be no impact on the business at all if we do experience an economic downturn soon. New subscriptions will likely be lower than they would be otherwise, while the company could see a drop in ad demand on its platform. However, Netflix’s dominance in streaming, multiple subscription options, and strong brand name and pricing power should allow it to retain the bulk of its subscribers and navigate a recession fairly well.
These strengths also make the company’s prospects excellent. Although streaming has gained significant traction, there remains plenty of white space in the industry. As the leader in this niche, Netflix is well-positioned to capitalize on the continued growth of streaming, especially as it expands into new areas, such as sports. Netflix stock has already delivered outstanding returns over the past decade, and it could do so again regardless of whether a recession is on the horizon.