One of the biggest topics on every investor's mind these days is inflation. The unexpected surge in consumer demand as economies started opening back up earlier this year has resulted in tight supply chains, labor shortages, and ultimately higher prices for goods. This has even led to questions about when and if the Fed should begin tapering its massive bond-buying measures.
For investors, however, owning shares in companies that benefit from (or at least are resistant to) the effects of inflation is a solid strategy to protect your portfolio. Here's why PayPal Holdings (PYPL -1.42%) is an excellent stock that fits that description.
Taking a cut of consumer spending
PayPal generates revenue by charging fees based on the amount of payment volume that occurs on its network. In the most recent quarter, the company processed $311 billion in total payment volume (TPV), which was up 40% year over year. And sales in the three-month period were $6.2 billion, an increase of 17% compared to the second quarter of 2020. PayPal currently has 403 million active accounts, of which 32 million are merchants.
The booming fintech benefits from inflation in an interesting way. If PayPal's merchant customers raise prices for the products they sell, the transaction volume PayPal processes will rise as well. As a result, revenue and profit growth will follow. From 2015 through 2020, TPV jumped from $282 billion to $936 billion. Net income during this time exploded 242%.
Being in this powerful competitive position is why PayPal's stock is a winner, soaring almost 600% in the past five years. Operating a two-sided payments ecosystem that takes a cut of all the economic activity occurring on its platform means that whether inflation is transitory or permanent just doesn't matter. In fact, the word "inflation" wasn't even mentioned once on the company's most recent earnings call, a clear sign that management doesn't view it as an important factor affecting the business. Shareholders should adopt the same mindset.
What about pricing power?
During inflationary times, you'll often hear that buying shares in businesses that exhibit pricing power is a good plan. Top consumer-focused stocks like Netflix and Chipotle Mexican Grill immediately come to mind, as both have been successful at raising prices for customers while at the same time quickly growing sales and profits. This is a lucrative strategy if companies offer a desirable product or service, can execute extremely well, and aren't just taking advantage of their customers. The vast majority of businesses, however, aren't like this. Additionally, businesses can only raise prices so much before alienating consumers.
Owning a payments company like PayPal is the next best alternative. And because it only facilitates transactions on its network, it also might be a better and more sustainable approach. Individual consumers don't see or care about what the payment network charges. Merchants do, but the fact that consumers are 60% more likely to purchase something when PayPal is present at checkout is valuable enough for them. Both user groups appreciate the convenience and security PayPal offers above anything else.
If you pay attention to the financial news, inflation is the single topic you hear about the most. Try not to worry too much about it. Instead, consider buying shares in PayPal. It's one of the best ways to position your portfolio for higher prices.