Signage for Chewy is seen on the trading floor ahead of their IPO at the New York Stock Exchange, June 14, 2019.
Andrew Kelly | Reuters
The continued growth of digital services should give some technology and digital media companies the ability to outperform during a recession, but not every stock is well-positioned, according to analysts at Nomura Instinet.
Fears of a recession in the U.S. rose last week when the main yield curve inverted, a historically reliable indicator of a slowdown. The action in the bond market, combined with continued trade uncertainty and stagnant economies around the globe, has led some economists and financiers to consider a recession in the next year or two.
The tech and digital media sectors have large exposure to advertising and discretionary consumer spending, two areas that are seen as high risk during hard economic times.
However, Nomura analyst Mark Kelley and two colleagues said in a client note Monday that e-commerce companies and those with strong digital advertising businesses should see secular tailwinds that make them winners during a downturn.
The analysts said that e-commerce stocks were the “best to own in such an environment,” singling out Amazon and pet retailer Chewy because the demand for pet products has shown to be resilient during recessions. While e-commerce sales growth slowed during the great financial crisis, the digital companies gained market share from traditional retailers.
“Amazon is also well-positioned as a general-purpose retailer,” the analysts wrote, while noting Nomura doesn’t officially cover the stock.
“We would expect this trend to continue in a future downturn, continuing the decline of legacy brick-and-mortar retailers that have suffered in the ‘retail apocalypse’ in favor of more nimble and online-focused marketplaces. We expect larger e-commerce platforms and niche retailers whose end markets are less discretionary to outperform,” the analysts said.
Advertising also took a big hit during the last recession, but digital advertising, which only accounted for about 15% of total ad budgets at the time, held up better than the industry as a whole. Though digital advertising is a much bigger market now, the analysts believe the digital side should still lift companies such as Alphabet and Facebook.
“We believe the continued transition to digital advertising should equate to digital advertising budgets holding up much better than legacy formats,” the analysts said.
Not every technology and media company can count on the strength of digital markets to bolster them during a downturn, the analysts said, pointing to video game companies as one industry that could be hit hard.
“We would be cautious regarding cash-flow-negative companies, such as Snap and Netflix, and those companies exposed to cyclical or discretionary end markets, such as ANGI Homeservices and the Interactive Entertainment sector, ” the analysts said.