If a recession comes, where do tech investors go? Here are some answers (NASDAQ: TMUS)

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As the Federal Reserve looks to slow surging inflation, worries have cropped up that the US and Global economies could enter into a recession if the Fed is unable to engineer a so-called “soft landing” for the economy.

Those worries have hit tech stocks more than others, as many tech companies are focused on growing revenue and care less about immediate earnings. And analysts at Citi have laid out the case for two different types of recessions, one that’s mild and another “more severe, macro growth scare,” and how those scenarios could impact the tech sector.

According to analyst Michael Rollins, the fallout from a recession would be “felt mostly” in the first-half of 2023, could hit earnings by 10%, and bring the S&P 500 (SP500) down to 3,650, with the response from investors to be earlier “on both the way in and out,” as with previous recessions.

Rollins said communication services should show “durability,” as investors may initially view the category as “relatively defensive” should a recession come to fruition.

T-Mobile (NASDAQ: TMUS) is still Citi’s top pick in space, but he said companies such as Lumen (LUMN), Cogent (CCOI) and AT&T (T) are at “greater risk” assuming a recession plays out. Rollins added that AT & T’s (T) cost cutting measures could “serve as a possible cushion if the company were to experience additional financial pressures in a recession scenario.”

Other stocks, like Verizon (NYSE: VZ) and cable companies could be viewed as defensive and may see a boost after underperforming recently.

Amongst software companies, Citi sees the space as having a number of defensive characteristics, including recurring revenue as most companies have switched to software-as-a-service [SaaS] models and have seen costs decline due to lower expenses and productivity gains.

“These characteristics help provide significant earnings and cash flow preservation during challenging economic times,” analyst Tyler Radke wrote in the note.

The firm recommends CheckPoint Software (CHKP), Fortinet (FTNT), Palo Alto Networks (PANW), Infinera (INFA), Teradata (TDC) and Oracle (ORCL), while adding that Cvent Holding (CVT), Adobe (ADBE), Expensify (EXFY), Autodesk (ADSK), PTC Inc. (PTC) and Smartsheet (SMAR) are more at risk.

Some semiconductor companies may outperform if a recession were to happen, particularly Broadcom (NASDAQ: AVGO) and Analog Devices (NASDAQ: ADI).

With regards to Broadcom (AVGO), analyst Christopher Danely said the company’s “server [and] networking demand, and enterprise spending, should remain strong throughout the year, supporting [Broadcom’s] revenue. “Danely also said Analog Devices’ (ADI) margins are” more sustainable “than its peers due to cost savings and revenue from its Maxim acquisition.

Micron Technology (MU), which has historically performed poorly during recessions, could buck the trend, the analyst noted, as the dynamic random access memory, or DRAM, market, is “now an oligopoly and any oversupply can be mitigated.” It’s also likely that the demand for the server market, where Micron (MU) gets 25% of its revenues, would remain strong.

Conversely, chip companies like Advanced Micro Devices (AMD) could fall, given that it generates 45% of its revenue from the PC market, one that appears to be decelerating.

Danely said, “A recession is likely going to dampen consumer sentiment,” and could negatively affect AMD’s (AMD) gaming business, which accounts for about 15% of the company’s total revenue.

It’s too early to tell whether the Fed will engineer a “soft landing,” but there are some analogies to the 1994 cycle, when the Fed was able to do so.

But just in case it does not, investors need to be prepared for the fact.

Earlier this month, Citi said chip giant Intel (INTC) may start to experience some headwinds as PC shipments continue to come in below the firm’s estimates.

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