Recent comments from Federal Reserve Chairman Jerome Powell confirmed the U.S. central bank intends to raise interest rates in the near future, and investors are coming to terms with the likelihood that multiple hikes are imminent. A recent report from Bank of America estimates that the Fed could be on track to raise rates seven times this year, and it's probably fair to say the market is jumpy right now.
With interest rates set to rise and a multitude of other risk factors on the horizon, being selective has taken on added importance. But recent market turbulence has also led to some promising stocks trading at big discounts. A panel of Motley Fool contributors has identified three companies that look poised for success despite the shifting macroeconomic climate. Read on to see why they think SoFi Technologies (SOFI 1.56%), Applied Materials (AMAT +5.98%), and Airbnb (ABNB +0.68%) have what it takes to be winners.
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Rising rates are good when you're the bank
Jason Hall (SoFi Technologies): The rise of so many fintech companies has been led by a lot of specialists. But SoFi has chosen to take a different approach, offering a wide array of financial services to its customers. This strategy is paying off, with the number of products customers use growing at an even faster rate than member growth every quarter since 2019. And its member count is growing fast: up between 50% and 96% every quarter of the past two years.
SoFi has relied on third-party partners for some of the services it offers, since it wasn't a bank. As a result, it must share in the profits of those services with its banking partners, while also not being able to be as competitive.
But that's about to change. In March 2021, SoFi announced it had reached a deal to acquire Golden Pacific Bank, a huge step forward that would lower its banking costs and improve its ability to compete. After many months, the deal just passed regulatory approval. That's fantastic for SoFi and its investors, but not just because of the improved cost structure it will gain by getting other banks out of the middle. Rising interest rates are generally good for banks, and I expect that will prove true for SoFi. It should be able to raise rates it earns on loans faster than the yield it pays on deposits.
With shares down 42% since the deal was first announced in March, I think investors are missing a golden opportunity to invest in a great growth story. Rising rates could supercharge that growth.
Interest rates won't stymy this red-hot industry
Keith Noonan (Applied Materials): Rising interest rates will likely create a more cautious backdrop for valuations and extra headwinds for companies that rely on debt to fund operations. However, there's still opportunity in the tech sector. Despite market turmoil getting most of the headlines, the semiconductor industry remains red-hot and has a favorable outlook, and Applied Materials is a player that looks poised to deliver wins.
Applied Materials provides equipment and services for the semiconductor industry, and it stands out as a worthwhile play for benefiting from the growth of the space. Sales surged 34% last year to climb over $23 billion, and net income soared 63% to reach roughly $5.89 billion. The company closed out the period with a 47.3% gross margin, an impressive figure that sets the stage for more strong earnings growth given the very strong demand outlook right now.
Despite the great business results, the stock has been caught up in the market's recent turbulence and now trades down roughly 19% from its high. That might look like a relatively mundane sell-off compared to the more dizzying pullbacks hitting some companies in the cloud software space, but it's a significant slide when viewed in the context of the business's fantastic momentum.
Chips will only become increasingly central to business and everyday life, and governments and companies are jockeying to improve their semiconductor design and manufacture capabilities. To put things in perspective, Intel recently announced it will be opening a new, $20 billion facility in Ohio, Samsung is gearing up to build a $17 billion facility in Austin, and these big moves are part of a much larger trend.
The semiconductor industry is still poised for huge growth over the long term, and Applied Materials is positioned to benefit from secular demand trends. The stock looks non-prohibitively valued trading at roughly 16 times this year's expected earnings, and the company's thriving business and solid balance sheet should help investors sleep easy amid rate hikes.
A travel company that could get a boost on the bottom line from rising rates
Parkev Tatevosian (Airbnb): The worldwide travel facilitator Airbnb may not be the first company that comes to mind when you think of businesses that could benefit from rising interest rates, but it could be an interesting play on the trend. Airbnb does not own or operate any physical structures that travelers can book on the website or app. Instead, Airbnb brings together travelers and hosts and facilitates the transaction. In return for its services, Airbnb takes a percentage fee.
One aspect of Airbnb's services is that it collects payments from consumers and holds them on behalf of hosts until the transaction is completed. That means that Airbnb often collects rental fees months in advance and only pays the host after the consumer completes their stay. That leaves an opportunity for Airbnb to collect interest income on these reserves held on behalf of hosts. Higher interest rates increase the return Airbnb can generate in those few months it has the cash balances.
In its most recent quarter ended Sept. 30, funds held on behalf of customers totaled $3.9 billion. They were as high as $6.3 billion in the peak summer season. Increasing interest rates by 100 basis points on $6 billion -- if the company had that level for a full year -- would increase Airbnb's income by $60 million before taxes. Not an insignificant sum for a company that lost $406 million on the bottom line in the nine months ended Sept. 30.
What's more, Airbnb has nearly $8 billion of its own cash on the balance sheet as of Sept. 30. Similarly, a 100 basis point increase in interest rates could boost the potential interest income on that balance by $80 million. Airbnb's stock has been down 30% in the last year. Investors looking for a stock that could benefit from rising interest rates would be wise to consider Airbnb.
