The U.S. technology sector was one of the biggest drivers of the decade-long bull market that finally ended earlier this year due to the health crisis. However, even though tech returns haven’t been great in 2020, technology sector stocks are down an average of just 3% year-to-date compared with a 12.3% drop by the overall S&P 500 (.SPX). 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, according to Morningstar.
Intel (INTC) is one of the largest semiconductor producers in the world. Analyst Abhinav Davuluri says Intel’s cloud and notebook businesses actually got a boost from the shift to work-from-home conditions in the first quarter. Despite the outbreak, Intel has kept all of its factories running and maintained more than 90% on-time deliveries. Davuluri still expects Intel to roll out a series of 10-nanometer products in 2020 that could serve as bullish catalysts for the stock, including its Tiger Lake central processing units for laptops. Morningstar has a “buy” rating and $70 price target for INTC stock.
Cisco Systems (CSCO) is a data networking technology leader with products related to routing, switching and other services. Analyst Mark Cash says Cisco’s recurring revenue model helps insulate the company during cyclical downturns in hardware spending. Nevertheless, Cash said many of Cisco’s customers are delaying their spending until there is more clarity about the economic shutdown. Cash says Cisco management is managing costs, and its transition from hardware to high-margin software and services will continue in 2020. Cisco also pays an appealing 3.5% dividend. Morningstar has a “buy” rating and $48 fair value estimate for CSCO stock.
Salesforce (CRM) 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% for the first time in the next couple of years because Romanoff says margin expansion should help maintain much higher earnings growth rates. Morningstar has a “buy” rating and $202 fair value estimate for CRM stock.
In addition to being one of the top semiconductor producers for the wireless communications, enterprise storage and industrial end markets, Broadcom (AVGO) pays one of the highest dividend yields in the large-cap tech group at 5%. While many companies are cutting or suspending dividends, Broadcom recently raised its payouts and said it has plenty of cash to both support the dividend and meet debt obligations. Davuluri says Broadcom should recoup much of the business it is losing in the first three quarters of 2020. Morningstar has a “buy” rating and $310 fair value estimate for AVGO stock.
ServiceNow (NOW) provides information technology automation services. Romanoff says ServiceNow’s strong first quarter in the middle of the extremely difficult environment is evidence that the company’s “land and expand” strategy is working. ServiceNow has been successful in both landing new customers and expanding its relationship with existing customers, growing its share of the IT service management market to around 40%. Romanoff says ServiceNow’s rise has been both rapid and mostly organic, and its greater than 97% customer retention rate is a testament to the company’s expertise. Morningstar has a “buy” rating and $388 price target for NOW stock.
VMWare (VMW) is a virtual computing software company that helps companies manage cloud infrastructure. VMWare and parent company Dell Technologies (DELL) withdrew their guidance in March due to the economic shutdown. Cash says both companies should recover lost business in time, and both stocks are undervalued. Morningstar is still projecting 8% VMWare sales growth in fiscal 2021 and 14% growth in fiscal 2022. Cash also says Dell should be able to navigate the downturn without tripping debt covenants after restructuring its debt several times in recent years. Morningstar has a “buy” rating and $202 fair value estimate for VMW stock.
Applied Materials (AMAT) is a global nanomanufacturing technology supplier for the semiconductor industry. Prior to the health crisis, Applied Materials management was calling for a resurgence in memory spending in 2020 and robust revenue growth for the company. Davuluri says the breadth of Applied’s businesses and its $2 billion research and development budget keep the company on the technological cutting edge, and it’s the closest thing to a chip equipment one-stop shop. Applied is able to outspend smaller competitors and provide solutions faster when new problems arise. Morningstar has a “buy” rating and $65 fair value estimate for AMAT stock.
Workday (WDAY) is a cloud-based human capital management and financial software solutions company. Analyst John Barrett says the current work-from-home environment doesn’t have a significant impact on human management needs, but layoffs could create near-term headwinds. Barrett is forecasting Workday’s revenue growth will slow significantly in fiscal 2021 but will bounce back aggressively in 2022. Barrett says he sees little cause for Workday’s base of more than 3,200 customers to change providers over the next several years, and the company should continue to gain market share. Morningstar has a “buy” rating and $183 price target for WDAY stock.
Cognizant Technology Solutions Corp.
Cognizant Technology Solutions (CTSH) is a global information technology services company that derives roughly 75% of its revenue from North America and has more than 70% of its employees located in India. Analyst Julie Bhusal Sharma says Cognizant’s double-digit revenue growth days may be over, but it can still accelerate its growth rate via investing in improving its technological capabilities and diversifying its client base. Long-term trends such as an increase in automation and a rise in the complexity of technology should provide tailwinds for Cognizant. Morningstar has a “buy” rating and $72 fair value estimate for CTSH stock.
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