3 Stocks to Watch as Firms Cut Costs Ahead of Potential Recession

Key Points

• Investors are worried about a potential recession in the coming quarters, making certain technology stocks more attractive than ever. 
• These stocks have gained the favor of Wall Street analysts because they enable businesses to cut costs by implementing technology and streamlining their operations. 
• Price targets and EPS growth rates stand to show investors why these companies could see higher prices ahead.

Investors today are worried about a potential recession in the United States economy, considering some slowing indicators such as inflation and employment. Today, more than ever, the two camps are divided and cannot agree on a direction. Data weakens, but the S&P 500 keeps making new all-time highs one after another, so the confusion is driving a wedge of speculation.

Speculating during volatility is one of the most futile activities to undertake with capital, so investors need to focus on the fundamentals and figure out what the future may look like a few quarters from now. If a recession hits the economy soon, then most businesses will likely start to look into cost-cutting initiatives, and costs will be reduced mostly by introducing technology and leverage.

Because of this fact, a few stocks in the technology sector stand out for investors to watch in this period. Supporting artificial intelligence and cloud services, investors can disregard the high valuations in Microsoft Inc. NASDAQ: MSFT and consider the savings that can be made in business services player Salesforce Inc. NYSE: CRM. Finally, who better to offer scale and leverage through technology than Amazon.com Inc. NASDAQ: AMZN?

Why Microsoft Stock’s High Valuation Could Be a Positive Signal for Investors

Through the classic offerings of Office products, Microsoft is at the center of providing a centralized, cloud-based service to most businesses worldwide. Microsoft's tailwinds are only getting started as the global economy becomes digitized and relies more on the cloud.

As the company grows its adoption rates of Azure, its cloud-based application development platform, more businesses could find this offering more attractive as they adjust their costs in a potential recession. In exchange for a monthly fee, Microsoft will enable companies to save thousands in payroll, insurance, and benefits.

Analysts at Wedbush now see the stock trading as high as their $550 price target, daring Microsoft to rally by as much as 35% from where it trades today. This double-digit upside disregards the fact that Microsoft now trades at a price-to-earnings ratio of 35.6x, but investors need to understand that this could actually be a good thing.

The market is typically willing to overpay for stocks it believes will deliver better growth or provide more safety in the face of volatility. Of course, this is not a value play; it is a play for the future growth and safety of capital during a potential recession.

Salesforce Stock: The Ultimate Cost-Cutting Strategy for Businesses

Companies that have accumulated several costs in sales teams and customer relations may be looking to trim the fat soon. If bearish investors are right about potential inflation hitting the United States, then bulls could profit from the opposing camp's right rather than lose money trying to fight it.

Salesforce lets companies streamline and digitize all processes related to customer relationships, sales, and process management. According to the company's latest quarterly earnings report, subscription revenue grew 9% over the past year to reach $8.7 billion.

Considering Salesforce's net revenue of $9.3 billion, most of the company's income is generated by subscriptions, which shows investors how high the company's offering adoption rates are. Businesses looking to cut costs during a potential recession are not the only bullish thing about Salesforce's business.

During uncertainty, investors will look for more stable and predictable cash flows, and subscription revenue is as predictable as possible. This is why analysts at Raymond James decided to boost their price targets for the company.

Landing on a valuation of up to $350 a share for Salesforce stock, these analysts now expect to see as much as 42.5% upside from where the stock trades today. Considering that the stock now trades at 77% of its 52-week high, investors can see the potential upside in closing the gap.

Amazon Web Services Could Propel Amazon Stock Through Potential Market Turbulence

Just like Salesforce’s offering, Amazon can start to attract new demand based on its Amazon Web Services (AWS) segment. Subscription revenue could create the double effect of stability and growth that some investors may want to tap into during a potential recession.

This could be one reason why Wall Street analysts expect to see 20.2% earnings per share (EPS) growth in the next 12 months. Leaning on these growth projections and potential tailwinds to hit Amazon in the next few quarters, analysts working at JMP Securities have placed a $265 price target on Amazon stock, daring it to rally by 50% from where it trades today.

Over the past 12 months, up to $74.5 billion in institutional capital has made its way into Amazon stock as well. Clearbridge Investments boosted its position by 1.6% in the past quarter alone, netting its investment of $3.8 billion today.