Regardless of if an economic downturn is coming this year or not, a recession will come sooner or later. That’s why filling your portfolio with stocks that have recession-proof business models is crucial.
Two stocks that I think fit this mold are CrowdStrike (NASDAQ: CRWD) and Autodesk (NASDAQ: ADSK), as both provide mission-critical software in their respective industries. Furthermore, each looks like a strong buy right now, and I think each makes a great addition to any investor’s portfolio.
CrowdStrike
CrowdStrike provides endpoint cybersecurity protection to its clients, a critical component of a company’s cybersecurity plan, as it protects network endpoints like laptops, phones, and cloud workloads. Third-party companies ranked CrowdStrike as a leader in this space and it was named by SE Labs as the best endpoint detection and response for three consecutive years. Part of the reason CrowdStrike’s solution is so potent is its use of artificial intelligence (AI). It utilizes AI to train its systems to identify what is normal activity and what is a threat, and can automate responses based on those results.
But it doesn’t just stop at endpoint protection. With over 20 modules adding different capabilities to its clients, CrowdStrike’s offering is quite broad, and it’s quickly becoming a one-stop shop for cybersecurity.
This has translated to its financial success, as CrowdStrike’s annual recurring revenue grew by 48% to $2.56 billion in Q4 of FY 2023 (ending Jan. 31). It also produces loads of free cash flow (FCF), converting 33% of revenue into FCF during the quarter.
This speaks to how well CrowdStrike will do if the economy sours. Businesses can’t cut their cybersecurity platform, as it would open them up to various attacks, which could cause further financial headaches. With it also producing free cash flow, CrowdStrike has plenty of financial resources to spend and maybe purchase struggling companies at a discount with its cash horde.
Still, CrowdStrike isn’t profitable — it lost $48 million last quarter. But, with $2.7 billion in cash on the balance sheet, it could operate for 14 years at that loss rate. If a recession strikes, CrowdStrike still must find a way to capture customers and get existing ones to expand. Even when enterprise spending slowed down during Q2 and Q3 of 2022, CrowdStrike posted a retention rate of 128%, meaning customers spent $128 that quarter for every $100 they spent the previous year.
While the nature of all recessions is different and difficult to predict, cybersecurity isn’t an item businesses can skimp on, which should bolster their business if a recession strikes.
With the stock trading near its all-time lows as a public company and still delivering outstanding growth, it looks like a strong buy.
CRWD PS Ratio data by YCharts
Autodesk
The days of engineers and architects hand drawing their designs are long gone. Instead, they use CAD (computer-aided design) software that allows them to perform to the best of their abilities. Because Autodesk’s software is tough to transition away from and necessary for its clients’ everyday jobs, it’s not software they can live without.
Autodesk is a much more mature company than CrowdStrike, so its growth numbers aren’t as impressive.
In Q4 of FY 2023 (ending Jan. 31), Autodesk’s revenue rose 9% to $1.32 billion. However, its FCF rose 26% in Q4, converting an unbelievable 69% of revenue into FCF. As Autodesk shifts how it bills customers, this metric will take a significant hit in FY 2024 but will rebound in the following years.
Looking at Autodesk from a price-to-FCF ratio, the stock is the cheapest it has been for some time.
ADSK Price to Free Cash Flow data by YCharts
With revenue expected to grow by 8% in FY 2024, Autodesk isn’t going to light the world on fire with its growth. However, it is a long-term compounder that can provide balance to your portfolio that CrowdStrike cannot.
Both companies can work in tandem in your portfolio to provide growth and steadiness. I think now is a great time to take a position in both stocks, and investors should take any opportunity to add to them.
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Keithen Drury has positions in Autodesk and CrowdStrike. The Motley Fool has positions in and recommends Autodesk and CrowdStrike. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
