Inflation has taken its toll on many growth tech stocks. Rising interest rates reduce available capital and increase the appeal of fixed income investments, both of which bode poorly for growth stocks.
However, some tech stocks operate business models that can drive higher revenue in inflationary environments. Those looking for such names should consider these three tech stocks: Amazon (AMZN 1.49%), Digital Realty Trust (DLR -0.71%), and PayPal Holdings (PYPL 1.41%).
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1. Amazon
After years of above-average increases, Amazon stock has suffered over the last year as consumers emerged from lockdowns to embrace offline shopping options again.
Nonetheless, amid rising inflation, Amazon can come back into focus for two primary reasons. One, its e-commerce division prospers in large part due to its lower costs. This could appeal to consumers looking to save money wherever possible.
Another money-saving trend relates to the adoption of Amazon Web Services (AWS). IT departments have long turned to the cloud to reduce costs. Due to rising prices, they have yet another reason to embrace this technology.
A temporary slowdown in sales growth may also serve as a buying opportunity. Net sales rose by 22% to $470 billion in 2021, and income surged 57% to $33.4 billion. Still, in the first quarter, the company forecasts dramatically reduced gains, somewhere between 3% and 8%. This slowdown has contributed to an 8% decline in Amazon stock over the last year.
However, its price-to-earnings (P/E) ratio of 48 takes its valuation to a multi-year low. This should add to the stock's appeal as its growth shields stockholders from the ongoing inflation storm.
2. Digital Realty Trust
Due to the increase in inflation, Digital Realty picks up an additional tailwind. The company operates properties built to house data centers, offering power availability, climate control, and physical security.
It has long benefited from the rising demand for data centers as IT becomes more cloud-focused. Nonetheless, like other real estate-related investments, data center REITs can serve as an inflation hedge. As the dollar loses value, real estate earns higher revenue from rising rents and rising values due to a comparative lack of supply growth.
This trend helped boost revenue to more than $4.4 billion in 2021, 13% higher than in 2020. AFFO income, a measure of REIT cash flows, came in at over $1.8 billion, or $6.25 per share. This is a 33% increase year over year.
That AFFO income can easily cover the current $4.88 per share paid out in dividends, a cash return of about 3.4% at current share prices. Additionally, the payout has risen every year since its inception in 2013. As data centers become more critical to both the tech and real estate industries, this dividend and the stock price will likely continue rising over time.
3. PayPal
At first glance, it seems inflation might hurt PayPal as consumers seek to spend less. However, it runs a business primarily based on taking a percentage of transactions. Hence, as nominal spending rises, revenue should also increase.
PayPal also offers additional features that could benefit consumers in such an environment. Its couponing app Honey brings discounts to consumers from over 30,000 different vendors. Moreover, its burgeoning buy now, pay later (BNPL) business is a financing option not tied directly to interest rates. This means borrowers could turn to this option rather than credit cards to finance some purchases.
The company continues to ride the fintech wave. Revenue rose 17% year over year in 2021 to over $25 billion. Net income fell 2% during this period to just under $4.2 billion, but only because income from strategic investments fell dramatically.
What has also fallen a lot is the stock price. The completed separation from former parent eBay and a heavier focus on current customers instead of adding new users soured some investors on the company. PayPal stock has fallen by nearly 60% over the last year and has given up all its pandemic-era gains.
However, the company expects to add between 15 million and 20 million new users despite its new emphasis. Its 32 P/E ratio is also near record lows, indicating an increased likelihood of a comeback for PayPal as it furthers its growth.
