Consumer-price-index inflation came in 8.5% higher year over year in March, marking the highest increase in more than 40 years. Perhaps even more concerning, the producer price index showed a record rise of 11.2% in the month -- the highest ever on record. Because it's reasonable to expect that producer prices will be passed on to consumers, signs suggest that there won't be any relief on the inflation front for shoppers in the near future.
In many ways, the inflationary conditions at hand are historically unprecedented, and factors including China's new pandemic lockdowns and food and fertilizer production disruptions stemming from Russia's invasion of Ukraine are poised to create ongoing complications. It's enough to make your head spin.
With the challenging economic situation in mind, a panel of Motley Fool contributors has identified tech companies that could respond well to inflationary pressures. Read on to see why they think investing in these three stocks could strengthen your portfolio.
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After sell-offs, this industry innovator is a steal
Keith Noonan: Shopify's (SHOP -2.37%) platform makes it easy for individuals and small businesses to launch and scale online retail stores. The company has also become a go-to service provider for large businesses looking to run and expand e-commerce operations.
The services innovator's core business makes money in two main ways: generating subscription revenue from clients using its services and taking a cut on each sale made through its platform. With inflation generally pushing prices higher, the company stands to see increased gross merchandise volume conducted through its platform.
Essentially, Shopify will likely be taking a cut from a larger pool of spending through its platform, while seeing comparatively smaller increases to its own operational spending. Of course, there is a risk that Shopify will see spending trends weaken substantially if the overall economy is pushed into recession, but that can be said for nearly every business under the sun.
In addition to its relatively strong positioning for a high-inflation environment, Shopify also looks attractively valued after dramatic recent sell-offs. Shares trade down a whopping 72% from the high they hit in November; the big pullback has created a worthwhile position to invest in a company that's poised to continue powering the growth of the e-commerce market.
Inflation works in Netflix's favor
Parkev Tatevosian: My favorite stock that benefits from rising inflation is Netflix (NFLX 1.74%). For one, the streaming pioneer has little in the form of physical inputs that will cause its expenses to grow along with the broader economy. Sure, it may need to pay more in wages, but that's a small part of its overall expense total.
More importantly, rising inflation gives Netflix a competitive advantage against other entertainment options. If AMC Entertainment Group needs to raise prices on movie tickets, popcorn, and soda, consumers are more likely to choose a Netflix subscription for movie nights. On the other hand, instead of keeping prices the same when competitors raise prices, Netflix could implement price increases of its own without losing its cost advantage. Both choices work out well for Netflix.
Already, its affordable price has worked in its favor, and Netflix has attracted 222 million subscribers worldwide. At less than $20, a family can get a month's worth of entertainment. That has boosted revenue from $3.6 billion in 2012 to $29.7 billion in 2021. Rising inflation will pinch consumers' wallets and lead them to look for more bang for their buck. Netflix, arguably, returns the highest benefit per dollar of spending in a typical family's basket of goods and services. As a result, it will benefit as costs go up and value becomes top of mind.
NFLX PS Ratio data by YCharts
Fortunately for investors, Netflix stock, like its service, can be had at a bargain price. The crash following its most recent subscriber growth slowdown has Netflix trading at a price-to-sales ratio of 3.2 and a price-to-earnings of 19.8. Netflix is trading at its lowest price in the last five years.
Capital-light platforms like Etsy can benefit from inflation
Jason Hall: There are a lot of things to like about Etsy (ETSY 0.49%). To start, it's become a dominant platform in e-commerce. If someone is looking for a handmade or customized item, vintage apparel, or a used instrument, there's a very good chance they will do it on one of Etsy's online platforms. With its Etsy brand, along with Reverb, depop, and Elo7, it benefits greatly from a strong network effect advantage. In 2021, 5.3 million sellers sold goods to over 90 million buyers. It has nearly doubled those numbers in just two years.
And unlike most retailers, including e-commerce giant Amazon, Etsy's business model positions it to benefit from inflation. That's because the company doesn't buy goods, keep inventory, or manage distribution centers. Its online platform exists to connect buyers and sellers, earning a percentage of each transaction, as well as offering other services to sellers for a fee. As a result, rising prices means higher fees for Etsy.
With only a 2% share of the market in the categories Etsy participates in, there's also a tremendous opportunity for growth. Consumers are increasingly interested in handmade and custom goods, as well as vintage and used items, whether for style, cost, or lower environmental impact. Etsy benefits from these major consumer trends. Lastly, it's profitable, and a bargain considering its growth profile. At recent prices, Etsy shares trade for 29.5 times earnings, and 22.6 times operating cash flow. Considering its favorable economics and growth profile, Etsy's an inflation-loving stock worth buying today.
