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3 Safe, Defensive Tech Stocks to Buy Right Now

The coronavirus outbreak is shaking our lives. At least 1.7 billion people have been requested to stay home to enforce social distancing and try to slow down its spread.

The impact on investors is no less remarkable. It took only 19 days for the Dow Jones Industrial Average index to switch from an 11-year bull market to bear territory on March 11. And at the time of this writing, March 24, the benchmark S&P 500 plunged by 34% from its recent all-time highs. That gives long-term investors the opportunity to buy solid tech stocks at a much cheaper price than a few weeks ago.

But when it comes to select the companies you want to own over the next several years, you should first focus on the potential of their businesses. The unknown impact of the coronavirus makes this task more difficult, though. Which companies are at risk if a recession materializes? Which ones will be impacted by short-term disruptions such as stay-at-home policies? And what about the long term?

The good news is, some tech companies may not be impacted by the potential problems of the coronavirus situation. Cisco Systems (NASDAQ: CSCO), Check Point Software (NASDAQ: CHKP), and Arista Networks (NYSE: ANET) should survive any prolonged recession the pandemic may cause, thanks to their strong balance sheets and high profitability. Also, their long-term potential remains intact since they provide the computing infrastructures the world will need no matter how the coronavirus changes our digital lives.

Image source: Getty Images.

Cisco Systems has it all

The tech giant dominates the networking industry. It increased its revenue to $51.9 billion during fiscal 2019, up 5% year over year. Its broad portfolio also covers the cybersecurity and communication areas. As such, no matter how we work when the coronavirus situation settles, enterprises will need Cisco's solutions.

Granted, Cisco should profit from the development of work-at-home policies. Its cloud-based cybersecurity product Umbrella and communications software Webex allow remote employees to work from home in a secure way.

But that remains a small part of Cisco's portfolio. The company's core business, which consists of selling networking hardware, software, and services, represented 82% of total revenue during the last quarter. And the need for those solutions remains significant.

For example, Netflix and Facebook recently lowered the quality of their video streaming to alleviate the strain on the Internet. After years of reduced capital spending, internet service providers such as Verizon Communications and AT&T will have to ramp up their efforts to still offer a performance network, which bodes well for Cisco. In addition, the deployment of new technologies such as 5G should also boost Cisco's business over the next several years.

Besides, the company can sustain a potentially prolonged recession that the coronavirus pandemic may cause. At the end of last quarter, its cash and equivalents exceeded its total debt by $11.1 billion. And thanks to its large scale, its strong operating margin -- 28.2% during the last quarter -- represents an extra safety net.

With its recent 25% drop over the last four weeks, Cisco's stock price has become attractive at only 12.2 times forward earnings.

Exposure to cybersecurity with Check Point Software

Check Point Software is much smaller than Cisco, but its $2 billion of annual revenue in 2019 -- up 4% year over year -- positions the company as an important player in its core cybersecurity market. Besides its legacy on-premises products, such as firewalls, that protect corporate networks, it offers cloud-based cybersecurity solutions that remote workers can use.

The company's transition to subscription-based software is having a negative impact on its revenue growth in the short term since smaller annual revenues are replacing large upfront payments.

But with its broad cybersecurity portfolio, the company is equipped to capture the forecasted 10.2% annual growth that the cybersecurity market represents over the next several years, according to the research company MarketsandMarkets. And that growth should materialize no matter how work-from-home policies evolve in the long run. Considering the significant threats, cybersecurity is not a discretionary expense anymore, no matter how we consume IT services.

Given that Check Point has $3.9 billion of cash and equivalents, no debt as of the end of last year, and a huge operating margin of 46% during the last quarter, investors shouldn't worry about any solvency risk (ability to pay debt) anytime soon.

The stock price dropped by 25% in one month, valuing the company at a modest forward price-to-earnings ratio (P/E) of 15.5.

Arista Networks is thriving in cloud data centers

Arista Networks competes with Cisco, mostly in the high-speed data center switching market where it increased its share from 10% in 2015 to 18% last year. The company's networking portfolio addresses the needs of cloud giants such as Microsoft and Amazon in terms of performance, scalability, and flexibility. As a result, Arista's revenue increased to $2.41 billion in 2019, up 12.1% year over year.

The company generates a significant part of its revenue from a few giant cloud providers. Microsoft and Facebook represented 23% and 17%, respectively, of total revenue last year. Thus, sales and marketing expenses remained low (8.9% of revenue), which led to an impressive operating margin of 33.4% in 2019.

The drawback is that Arista depends on the capital spending of these few large customers, which results in volatile quarterly results. For instance, fourth-quarter revenue dropped by 7.2% year over year after a 16.7% increase during the prior quarter.

Yet the company is exposed to the secular growth that cloud computing represents. And with $2.7 billion of cash and equivalents and no debt, the company would not be put at risk if a prolonged recession occurs.

With the 27% drop in Arista's stock price in one month, the market values this growth stock at 22.5 times its forward earnings, which seems reasonable.

10 stocks we like better than Cisco Systems
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Herve Blandin owns shares of Cisco Systems. The Motley Fool owns shares of and recommends Amazon, Arista Networks, Check Point Software Technologies, Facebook, Microsoft, and Netflix. The Motley Fool recommends Verizon Communications and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.


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