Investing During a Recession: 3 Tech Stocks to Target | The Motley Fool (2024)

The market has become more volatile over concerns of a potential recession.

Recessions, or periods when the economy contracts, aren't fun. Unemployment rises, and prices on stocks or housing fall, sometimes sharply. It can be frightening. Buying stocks during a recession will probably go against every primal emotion you have.

However, history has repeatedly shown that recessions are great long-term buying opportunities. As Warren Buffett has said, "Be greedy when others are fearful."

Here are three top AI stocks that have begun unwinding their massive gains and could be fantastic targets if market volatility continues.

1. Broadcom

Nvidia gets most of the headlines among semiconductor companies, but Broadcom (AVGO -2.19%) is a rock star that long-term investors would be wise to focus on. The company sells a mix of semiconductors and software used in end markets related to networking, cloud, and wireless technologies. Revenue is split roughly 60/40 between chips and software, which helps diversify the company. The stock is a market beater that has outperformed the S&P 500 by a landslide this decade.

Financially, Broadcom is a juggernaut. The company generates over $42 billion in annual revenue, over 40% of which is free cash flow. Broadcom's management returns cash to shareholders via dividends. The dividend has increased for 15 consecutive years, growing at a sizzling 36% annualized rate over the past decade. Investors should still see plenty of double-digit dividend growth moving forward. The company is still growing, and the dividend only costs 50% of its cash flow.

Artificial intelligence (AI) should only add to Broadcom's existing growth. Roughly 35% of Broadcom's expected 2024 chip revenue is going to AI, and it recently discussed building a custom chip for ChatGPT developer OpenAI. Analysts believe Broadcom will grow earnings by an average of 18% annually over the long term. Recent volatility has knocked the stock from a forward P/E of 38 to 30, making Broadcom an increasingly interesting stock idea given its growth prospects.

2. Microsoft

Technology giant Microsoft (MSFT 0.17%) could be a case of the rich getting richer. Microsoft is weaving AI into its tech empire, adding AI features to its consumer and enterprise software products and making Azure a leading platform to power AI applications. Remarkably, a business with nearly a quarter-trillion dollars in annual revenue is still growing at a double-digit pace, and analysts expect over 13% annualized long-term earnings growth. Decades of growth have made Microsoft one of the best stocks ever; shares have returned almost 680,000% since its initial public offering (IPO).

Microsoft has generated $74 billion in cash flow over the past four quarters, more than most public companies are worth. It's plenty to invest in growth, buy back stock to boost earnings growth, and pay a dividend that has grown for 22 consecutive years. Microsoft is one of two public companies with a perfect AAA credit rating, higher than the U.S. government. An unmatched combination of safety and upside makes the stock a no-brainer for any investor.

The stock trades at a P/E of 34 today versus a five-year average of 32. Keep an eye on Microsoft for a potential buying opportunity. Earnings growth will steadily bring that P/E down over the coming quarters, and market volatility could deliver shares to an attractive buying price sooner than you might think.

3. Palantir Technologies

Data analytics company Palantir Technologies (PLTR 2.02%) is the youngest stock in this group but could have the most long-term growth potential. Palantir builds custom software applications on its proprietary platforms, Gotham, Foundry, and Artificial Intelligence Platform (AIP). The U.S. government has used Palantir's technology throughout the military and other branches for over a decade. Now, Palantir is pushing into the private sector, where its AIP platform is seeing robust demand from companies trying to develop and launch AI applications.

Palantir has become consistently profitable under generally accepted accounting principles (GAAP), likely cementing its long-term staying power. Its fortress-like balance sheet backs that up; Palantir has zero debt on its books and $3.8 billion in cash. The company still has less than 300 U.S. commercial customers, though that number grew 69% year over year in Q1, highlighting its strong momentum.

Analysts believe Palantir will grow earnings by an average of 22% annually over the next three to five years, and broad demand for AI and data analytics could fuel growth far beyond that. The stock already reflects a lot of short-term growth; shares trade at a hefty P/E of 75, which is steep even for a company growing this quickly. That makes Palantir a perfect buy-the-dip candidate if a market downturn brings the price down.