2 Stocks That Still Have Pricing Power, Even as Inflation Soars

There are always many factors that investors should consider before buying a stock, but in the current inflationary climate, the business's pricing power may be one of the more important ones. In this segment of Backstage Pass, recorded on Jan. 14, Fool contributors Rachel Warren and Toby Bordelon discuss two companies that have insane pricing power right now and can keep winning for investors over the long haul. 

Rachel Warren: I agree, I think pricing power, you don't really have to look any further than what we're seeing Netflix do here. It's funny because I'm a longtime subscriber, and I already, for some reason, thought the basic plan was $9.99. [laughs] So to me, this will not be a big change.

When I think about companies that have pricing power -- basically, the ability to raise their fees, raise the cost of whatever products or services they are selling, and still be able to maintain their customer base -- I think some of that you could see potentially with companies that are more essential retailer status companies that you saw earlier in the pandemic.

For example, some of these big retailers like Costco -- people are going to keep shopping at Costco no matter what is happening with the market or the economy, because those are providing the key products that people need.

But going beyond that, a company that I've thought of a lot -- that I firmly believe has a lot of pricing power because of the services it provides, and because this is a company that's seeing such tremendous growth -- is Shopify (SHOP -2.37%). This is a company that makes money from fees, like payment processing fees, such as merchant-solutions revenue, or subscription fees. It could raise those prices just even a little bit if it needed to, like what we've seen Netflix do here.

An extra dollar a month is really not going to be a big deal for most people, but you aggregate that over all the customers that this company has, and that growing customer base, and that adds up to a lot of profit and revenue for a company like Shopify.

I also think companies like Shopify that operate in this software-as-a-service space -- and specifically Shopify, as an e-commerce giant -- they're really well-primed to deal with an inflationary environment because many of the overhead costs that you could see with other companies that have a more physical product that people are buying, those costs simply aren't there. I think that gives a company like Shopify a lot of leeway.

For example, right now, its basic plan -- let's say you want to start an online store on Shopify, and you want to just do their basic plan. It's $29 a month. Let's say they decided we're going to raise that $1 [to] $30 a month. That's not going to be a huge deal for most merchants on the platform.

Obviously, there's various tiered accounts from there, but I think if you're looking for a company that can operate really well in an inflationary environment, and that has that pricing power, some of these software companies that aren't dealing with the same types of costs as companies that sell visible products I think are a great place to look, and Shopify is definitely one of them.

Toby Bordelon: Another great recommendation there, Rachel. I like what Connor was talking about brand power, that that can drive pricing power. You think about brand power, I'm thinking about Disney (DIS 0.18%), which is a company with a great brand. I think they have several avenues in which they can raise prices, and people would just be, well, not fine with it, but they'd  pay them.

Like the theme parks: Prices have gone up at the theme parks this year as people rush back, and they're still controlling capacity to some extent. They seem to not have had any problems with that, as near as I can tell. Part of that is by necessity because their labor costs are going up, so they've got to get [prices] up. But it's also because there's just built-up demand that they're able to do that.

You think about Disney+. If Netflix can get to $20 a month at their highest level, I've got to feel like Disney+ at some point can start creeping their prices up even a little more. They did a raise not too long ago. I think a dollar. Though I don't believe their bundle went up when they did that.

You could think about them both raising the bundle and even raising the core Disney+ product. Especially now, they seem to be hitting their stride with a Marvel release and a Star Wars release. It's getting pretty good there in terms of the original content. You also think about the movies.

They don't control how much the consumer pays when you go see a movie in a theater, but typically, they split their revenue 50/50 with the theater. They can start pushing that even more, saying, "We're going to get 60%, were going to get 65%." Then the theater owner responds by bumping up the price to keep their revenue stable.

When you look at the box office smash that their latest release was, the Spider-Man movie. They have content that people want in their theaters -- theater owners, to get people in there. You can certainly see some opportunity there for them, so that's one that definitely comes to mind for me. 

[Editor's note: Spider-Man: No Way Home was a Sony Pictures release, not a Disney release. Disney contributed 25% of the production budget, and will receive 25% of the film's profits.]