A business that has high margins has much more of a buffer to handle adversity and rising costs. If a company's cost of revenue is significant and leaves little of the top line left to cover overhead and other operating expenses, it can be difficult to consistently stay in the black.
A great example is Amazon, where cost of sales is normally 80% or more of revenue. When it battled rising costs last quarter, it posted its first loss in years.
Biotech company Regeneron will see its sales dip this year as it won't get a huge boost from its COVID-19 treatment, REGEN-COV, which isn't as effective against the omicron variant. But the company has been looking at other ways of strengthening and diversifying its business.
In just the past few months, Regeneron has closed on a couple of deals. One was to acquire immuno-oncology company Checkmate Pharmaceuticals for $250 million. It also bought out Sanofi's stake in cancer treatment Libtayo for $900 million plus royalties and milestone payments that may need to be paid in the future. These transactions will help to increase Regeneron's revenue (in the case of Libtayo) while also adding to its pipeline (Checkmate has a promising cancer drug, vidutolimod, that is in phase 2 trials).
Regeneron will likely have to invest more into its business if it wants to accelerate its growth and make up for COVID-19 revenue, which in 2021 totaled $5.8 billion and accounted for 36% of its top line. But the healthcare company is in good shape to do that because its runs a lean operation. Its gross profit margin is normally above 80%, and that was even before the pandemic. That has enabled Regeneron to consistently post profits over the years. And with strong margins, it has plenty of buffer should its costs start to creep up.
Software giant Adobe benefits from having a largely subscription-based business that keeps its margins high. Through the six-month period ended June 3, the company's sales have risen by 12% year-over-year to $8.6 billion. And of that amount, more than $8 billion (93%) came from subscriptions.
Subscriptions combined with digital products make it relatively easy for Adobe to remain hugely profitable -- its gross profit margins are 88% of revenue. A key reason for its success is that Adobe's brand is well-known around the world. if you want top-of-the-line photo editing, Photoshop is the place to go. You can always tell a brand is incredibly popular when it becomes a verb (e.g. a "Photoshopped image"). As a result, Adobe doesn't have to spend a lot on sales and marketing efforts to pump up its business and grow its sales, as its products can sell themselves.
Through the past two quarters, Adobe's net income has totaled $2.4 billion, up a slight 2.8% from the same period last year. It's not great, but within the context of inflation, it's a good result. Adobe's digital-based business should avoid the worst of inflation, but even if its costs increase, its healthy margins should ensure its bottom line remains resilient.
Visa is another company with a well-known brand. Its credit cards are accepted all over the world, and its costs are also fairly thin. Gross margins of 80% are impressive, as the company's main expenses to facilitate revenue growth are its personnel fees and networking and processing costs, which have totaled $2.7 billion through the last two quarters. That's less than one-fifth of the $14.2 billion that Visa booked in revenue during that period.
The company will face challenges this year due to the war in Ukraine. Earlier this year, Visa and other major card issuers said they were suspending their operations in Russia as a result of the country's actions. A loss of sales could weigh down the company's numbers when it reports earnings. However, a surge in pent-up travel demand and spending this year could help offset those declines.
Either way, with profit margins normally at 50% or better, Visa's business is in an excellent position to weather a storm, whether it's due to a geopolitical issues, inflation, or economic uncertainty and fears of a recession.