Inflation is a topic of great debate among stock investors right now. One thing they can all agree on is that it's really high this year, posting a rise of 6.2% in October on a trailing-12-month basis. To give you a reference point, the Federal Reserve targets an annual inflation rate of about 2%.
The question is whether it's transitory (pushed higher by temporary supply chain issues), or whether it's here to stay, and Federal Reserve Chairman Jerome Powell might have just conceded that it's set to remain higher for much longer.
It might be time to prepare for this new environment, and three Motley Fool contributors think Square (SQ -0.20%), GoodRx (GDRX 1.81%), and PayPal (PYPL 0.48%) are great ways to combat -- and even benefit from -- inflation. Here's why.
Payments are the place to be
Anthony Di Pizio (Square): Square is an innovative financial technology powerhouse with a two-pronged focus on businesses and consumers, and it's a great way to play an inflationary economic environment.
On the business side, it offers physical payment terminals for brick-and-mortar stores that allow them to process credit card transactions. Additionally, it's in the middle of an enhanced rollout of its Square Invoices service, which helps businesses bill clients quickly and digitally. The kicker: Every time a payment is processed in the Square ecosystem, Square earns a fee of between 1.6% and 2.2%, depending on the method.
That means when prices in the economy are rising broadly, the dollar value of those percentage-based fees is also constantly increasing. Square basically has a built-in, organic hedge against inflation -- and its seller ecosystem has generated over $153 billion in gross payment volume over the last 12 months.
On the consumer side, Square's CashApp serves as an alternative to banking products. It allows for purchases, instant peer-to-peer money transfers, and it even has an investing platform. Over 40 million monthly active users are on CashApp, and while many of its key features are free, Square earns a commission of about 2% when its customers buy and sell the cryptocurrency Bitcoin.
That's important because Bitcoin volume has accounted for 59% of Square's total revenue so far in 2021.
The company is coming off a gigantic $29 billion all-stock deal to acquire buy now, pay later leader Afterpay, which is destined for a critical integration with CashApp. It will allow CashApp users to seamlessly discover, and finance, goods and services from their favorite retailers right from their smartphone.
It's yet another arrow in Square's quiver, and investors could do well to own the stock into the new year as inflation remains elevated.
The Robinhood of prescriptions
Jamie Louko (GoodRx): With inflation on the rise, lots of goods that we buy are increasing in price. This is amplified for prescription drug prices, which have increased over the past 20 years at double the rate of inflation. However, the discount prescription provider GoodRx is changing that by giving discounts to everyday Americans on prescriptions for free.
GoodRx helps consumers cut prescription costs and save up to 80% on prescriptions for free by offering coupons that can be used at most pharmacies. Since its inception, GoodRx has saved customers over $30 billion dollars by doing this.
How does GoodRx convince pharmacies -- which earn very high margins on these drugs -- to accept these discounted prices? The answer is relatively simple. GoodRx partners with pharmacy benefit managers (PBMs), the middlemen between pharmacies and drug makers, to offer customers the price that pharmacies pay. PBMs and GoodRx both get a slice of each transaction made with the GoodRx app. Pharmacies have to accept these prices because they'll lose out otherwise. After all, if Pharmacy B across the street accepts GoodRx but Pharmacy A doesn't, it could lose a lot of business.
This innovative solution has attracted over 8 million users, over 1 million of which pay a monthly $6 subscription called GoodRx Gold to get even lower drug prices. In addition to discount drug coupons, the company has a robust telehealth business and an ad business where drug manufacturers can advertise on GoodRx's free app and GoodRx Health, its free WebMD-like health website. Combined, these two businesses brought in $23 million in Q3, just 12% of revenue -- but the segments are growing 177% year over year.
So Why is GoodRx a good hedge against inflation in 2022? Almost all of the company's top line turns into gross margin (which is currently 94%), and most of its expenses come from sales and marketing. Therefore, GoodRx is relatively unaffected by rising drug prices and it can keep its prices low without being affected. This ability to maintain prices will only make GoodRx more attractive to consumers, resulting in faster customer growth in its core business.
GoodRx is eyeing an $800 billion addressable market, and if the company can acquire more free users and convert some users to Gold, it could grow into a massive opportunity. If GoodRx is successful at bringing in more subscribers while earning greater fee revenue from free users, it could capitalize on higher inflation, which is why I think this stock could soar in 2022.
The world's most accepted digital wallet
Trevor Jennewine (PayPal): PayPal is one of the world's best-known fintech businesses. Its portfolio includes merchant services like payment processing, fraud management, and financing, as well as consumer products like mobile wallets, crypto trading, and shopping rewards. And the network effects created by that ecosystem have made PayPal the most accepted digital wallet worldwide -- over 75% of the top 1,500 business offer PayPal at checkout.
In the last two years, the company has introduced a range of new products designed to boost engagement and reinforce its advantage. For instance, PayPal has expanded its in-store presence with the Venmo credit card, QR code payments, and the launch of PayPal Zettle in the U.S., an omnichannel point-of-sale solution. The company has also introduced "buy now, pay later" financing in several geographies, and it's added support for cryptocurrency to its mobile apps.
On that note, PayPal recently debuted its upgraded mobile app, a personalized platform with new features like in-app shopping tools, bill pay, and direct deposit (with two-day early access). In 2022, the company will add high-yield savings accounts to the app, aiming to create an end-to-end financial solution for consumers. That's particularly timely, as digital wallet usage is expected to double by 2025.
From a financial perspective, PayPal has plenty of momentum. In the third quarter, active accounts climbed 15% to 416 million, and payment transactions per active account rose 10% to 44.2 -- that last metric is particularly noteworthy, as it suggests improving engagement and validates management's growth strategy. As a result, revenue rose 13% to $6.2 billion, and quarterly free cash flow jumped 20% to $1.3 billion. For context, all of that growth comes on top of supercharged financial results during the initial wave of pandemic.
Here's the bottom line: The market is seething with volatility right now. The omicron variant of the coronavirus has created uncertainty, and rising inflation rates only make the situation more complicated. Not surprisingly, we've already seen sharp sell-offs, particularly in growth stocks. But no matter how those situations shake out, PayPal's strong competitive position should make it a winner over the long run.
For instance, if inflation remains elevated, PayPal might actually benefit, because it generates revenue by taking a percentage of spend. And if the coronavirus does indeed bring more lockdowns, PayPal will benefit from the uptick in online shopping that's sure to follow. Alternatively, if neither of those things happen, e-commerce and digital payments are still high-growth industries, and PayPal has established itself as a key player.
Finally, PayPal stock is currently down 42% from its all-time high, due to a combination of Bernstein analyst Harshita Rawat's recent downgrade, soft fourth-quarter guidance, and general weakness in growth stocks. But that pessimism seems overdone. That's why this stock is set to soar in 2022 (and beyond).