It's time to address an important issue in investing: "Crashes." They happen. Quite frequently, in fact. When it comes to stocks, a crash (for our purposes here, when the stock market drops at least 10% from recent highs) occurs close to once a year on average. It's normal for individual stocks to drop even more than that on a frequent basis.
But shares of top-notch businesses quickly recover from these downturns. Thus, if you are focused on owning high-quality growing companies, market crashes aren't fearsome events as much as they are an opportunity to double down on your best stocks. These three Motley Fool contributors think you should be ready to buy Unity Software (NYSE:U), Tesla (NASDAQ:TSLA), and Amazon (NASDAQ:AMZN) when the next bout of market turbulence strikes. Here's why.
An emerging software platform built for the digital-first era
Nicholas Rossolillo (Unity Software): Unity Software is one of those behind-the-scenes companies few have ever heard of, but an increasing number of people consume products made with Unity without ever realizing it. The company started out (and still remains today) a video-game creation platform. But it's quickly becoming so much more than that.
You see, Unity was designed to help developers create 3D environments. With video-game graphics always improving, this 3D sandbox has an obvious advantage over older, two-dimensional tools. And because Unity is cloud-based software, developers can create and update in real time and collaborate with others. This has wide-reaching use beyond gaming although billions of people around the globe download and play a game made with Unity every year. Unity's 3D creation software is finding utility in engineering and architecture, manufacturing, video-content editing, and marketing too.
And the company is quickly growing other ancillary services within its software suite, including app marketing and content delivery on the web. While the video-game industry is what's really moving the needle right now, there's so much potential and optionality to expand in new directions for this outfit that management thinks it can grow revenue an average of 30% a year for the foreseeable future.
It has a stellar balance sheet to back up its ambitions as well, with $1.65 billion in cash and equivalents, and no debt on the books as of the end of March 2021. The next time the stock market takes a header and inevitably takes Unity stock down a notch, scoop up a few shares of this leading 3D virtual-environment creation engine.
Extreme volatility triggers extreme opportunities
Anders Bylund (Tesla): If history has taught us anything, we have learned that volatile stocks such as Tesla tend to amplify whatever is going on in the broader market. They soar when times are good, and they often crash much too hard when the business environment tightens up. For example, take a look at the initial COVID-19 panic. The S&P 500 market index fell 29% in a month. Tesla's stock plunged 61% lower over the same period:
Tesla's rebound from that dark well was also dramatic. The stock has gained 750% since that market bottom in March 2020, easily beating the S&P 500's 76% return. Tesla's volatility has been soaring ever since the coronavirus crisis started as shown by the one-year Beta value rising from an already-high 2.0 to a towering 4.6. As a reminder, a Beta value of 1.0 means that the stock is moving in tandem with the broader market. Higher values point to a higher magnitude of magnification of the broader market's pricing trends, and Tesla's value is extreme.
CEO Elon Musk is not shying away from Tesla's explosive and unpredictable nature. He often stirs the pot himself by tying Tesla's fortunes to the mercurial value of leading cryptocurrency Bitcoin (CRYPTO:BTC). A steady stream of tweets from Musk has proven effective in changing Bitcoin's prices in the short term. Time will tell if his social media adventures will have a permanent effect on the cryptocurrency market.
In more concrete terms, Tesla has invested $1.5 billion in Bitcoin tokens. Tesla and Musk have some serious skin in the cryptocurrency game, and that sets the stock up for even more volatility as the Bitcoin market continues to deliver wild swings on a regular basis. It's not much of a risk, mind you. Tesla's Bitcoin holdings amount to just 0.2% of the company's current market cap. The perception of Musk taunting the fates with a large Bitcoin investment is only loosely based on reality.
I would not be surprised to see Tesla's stock taking another deep dive in the next wholesale market correction no matter what the reason for this crash might be. At the same time, Tesla's actual business is doing just fine, and the company has been successful in shifting the entire car market toward electric vehicles. Buy on the dip and watch Tesla experience yet another dramatic bounce. Don't call it a comeback because the company will never really have gone away.
The "everything store" is recession-resistant and could take off again
Billy Duberstein (Amazon): It's not exactly an off-the-radar pick, but Amazon.com is a strong buy today, even if the economy were to fall into a recession.
Some have a difficult time characterizing Amazon since it has its tentacles in so many industries, from e-commerce to streaming video, grocery stores, cloud computing, and digital advertising.
But I tend to think of Amazon as an infrastructure company. In its core e-commerce segment, Amazon has developed its integrated website, fulfillment-center network, and in-house and partner-delivery fleets to deliver goods quickly and cheaply. In cloud computing, Amazon has built out a secure global data-center footprint and necessary technical infrastructure to house the computer and storage needs of enterprise customers worldwide, from start-ups to the biggest companies on earth.
This vital infrastructure certainly came in handy during the COVID-19 recession but would also be a bedrock of the economy during any sort of future economic downturn. While Amazon's results are tied to consumption patterns, a lot of this consumption is for consumer staples and basic necessities. The Amazon Prime subscription is a fantastic deal for customers, and I don't believe many would cancel even when things get tight.
One particularly interesting new innovation is the Amazon Fresh grocery store, built with cashier-less AI technology. Amazon has rolled out several of these over the last year and just opened another new full-service grocery store with cashier-less technology in Bellevue, Washington last week. Cashier-less technology has the potential to lower costs and increase throughput in the low-margin grocery sector, a sector that is typically recession-proof. Amazon has also discussed licensing this technology to other retailers as well, which would cut down on their labor costs.
Adding to this big picture, Amazon has the clear financial strength to weather any downturn, with over $73 billion in cash on the balance sheet against just $32 billion in debt. In fact, due to this strength, Amazon tends to capitalize on the weakness of smaller competitors during downturns. And given Amazon's consistently high pace of innovation, its secular growth posture should be enough to overcome any cyclical weakness in the economy.
Amazon's stock is still just below the all-time highs set last summer, with the stock essentially having flatlined for the better part of a year. That may be setting this defensive stock up for its next big move higher.