Anyone who has refueled a car, made a trip to the grocery store, or tackled a home-improvement project in the past year doesn't need to be told that inflation is running red hot. Consumers understand the problem experientially.
Inflation is also a problem for some businesses. Their expenses go up faster than revenue, leaving them with dwindling profits. But fortunately, there are companies that can resist inflation, and online marketplace eBay (EBAY 0.31%), payments network Mastercard (MA -0.08%), and travel-booking platform Airbnb (ABNB 0.10%) are three such companies, in my opinion. And all three stocks are trading at attractive valuations right now.
1. eBay: A growing take rate
Don't scoff at an eBay investment: The company is still relevant after decades of being in business. It might not dominate every e-commerce category, but it's still a go-to platform for niche categories like automotive parts. And it's one of the only places for a large selection of hard-to-find pre-owned items like trading cards.
eBay is inflation-resistant because it doesn't carry inventory. Third-party sellers supply the inventory. If merchandise costs goes up because of inflation, these sellers will raise prices. And if they can't raise prices fast enough, perhaps their earnings will go down. But eBay is agnostic to a third-party seller's profit margin. It takes its cut (referred to as a "take rate") either way.
The company generates revenue simply by providing a marketplace that connects buyers and sellers. It's true that activity on the platform is falling -- active buyers in the second quarter of 2022 were down 12% year over year to 138 million. But eBay's take rate has been increasing as it has rolled out proprietary payment services. In the second quarter, its take rate was 12.4%, compared to 11.1% in the prior-year quarter.
As prices go up on its platform because of inflation, eBay is poised to increase its revenue per transaction without necessarily increasing its costs. And this gives reasonable certainty that the company will remain highly profitable. Its operating-profit margin is 25% through the first half of 2022, which is quite good.
With its cash flow, eBay has focused on creating shareholder value through share repurchases and a growing dividend. And its dividend is why I believe the stock is a great buy right now. According to YCharts, the average dividend yield for the S&P 500 is 1.8%, as of September. By comparison, eBay's dividend yield is sitting over 2.2%, its highest ever. And management has plenty of room to grow it from here, just as it has over the past few years.
EBAY dividend yield. Data by YCharts.
2. Mastercard: Impressive growth despite headwinds
Mastercard is inflation-resistant for the same reason as eBay, albeit on a much larger scale. Whereas eBay handled about $38 billion in merchandise volume in the first half of 2022, Mastercard facilitated roughly $4 trillion in worldwide volume on its payment rails. And even though that number is incomprehensibly large already, it's still growing.
Mastercard's gross dollar volume in the first half of 2022 was up 10% from the comparable period of 2021. About two-thirds of this volume came from outside of the U.S. And dollar volume internationally was up 16% year over year in the second quarter of 2022.
This is surprising for two reasons. First, Mastercard suspended operations in Russia in March, so this is a drag on its international volume. Second, the U.S. dollar is the strongest it's been since the early part of this century. This means that volume in local currency looks less impressive after converting it back to dollars. And despite these two headwinds, Mastercard's rest-of-world volume was up 16%.
I believe Mastercard's overall volume strength demonstrates how inflation-resistant it is. And there's a further consideration backing up my point. A recent report from the International Monetary Fund (IMF) says, "Food inflation alone has eroded global living standards at the same rate as inflation of all consumption did in the five years immediately before the pandemic." Even with living standards eroding, Mastercard's volume continues increasing around the world nonetheless. People clearly use its payment rails even in hard times.
There are many ways to value a stock, one of which is the price-to-earnings (P/E) ratio. Right now, Mastercard stock trades at a P/E of about 30, which is its second-best valuation in the past five years -- only behind the market crash at the start of the pandemic.
MA PE Ratio. Data by YCharts.
It's reasonable to assume that global economies will stabilize in time, which should bring the U.S. dollar back to traditional levels and consequently boost Mastercard's reported earnings for international revenue. In conclusion, buy Mastercard during these tough times at a reasonable valuation, anticipating better days tomorrow.
3. Airbnb: It still benefits from growing adoption
Of the three businesses in focus here, Airbnb is the least inflation-resistant. Travel is a discretionary-spending category. And as inflation hits consumers in the wallet, there's less leftover cash to splurge on getaways. Therefore, Airbnb's revenue could possibly drop if people cut back. That said, management hasn't noticed any slowdown yet.
Travel spending isn't necessarily inflation-resistant, but Airbnb's business model is. Like eBay, it's just a marketplace. Third-party hosts provide their inventory of homes and experiences to the platform. And these third parties are the ones whose profits are affected when expenses go up on things including utilities, toiletries, and other items necessary for running a short-term rental business. Airbnb is immune to these inflationary pressures; it takes its cut of the transaction regardless.
Over time, the average daily rate (ADR) on Airbnb has crept higher. In the second quarter of 2022, the average stay in an Airbnb listing cost $164 per night, up 1% from last year and 40% from two years ago. And its ADR has continued growing even though there's a greater supply of Airbnb listings.
If inflation starts eating into short-term rental hosts' profits, it's reasonable to assume they'll raise rates and Airbnb's ADR will go up. Some travelers might balk initially. But what affects one host will likely affect many other hosts and even other lodging options like hotels. In short, inflation will increase expenses across the board, leading to increased prices and higher ADRs. And if this happens, Airbnb will generate higher revenue per booking by maintaining the same take rate.
Trading at a price-to-sales (P/S) ratio of 10, the stock isn't cheap in absolute terms -- you can find companies trading cheaper. But it trades well below its average P/S valuation since it went public nearly two years ago.
ABNB PS ratio. Data by YCharts.
As a closing thought, remember that high inflation won't always be a pressing concern. Whether later this year or a few years from now, I would expect inflation to return to its historical rate. Therefore, while it's nice knowing eBay, Mastercard, and Airbnb have inflation-resistant traits, this isn't the only factor to consider when investing. Indeed, many companies heavily affected by inflation will overcome it and still be good long-term investments from today. So make sure to keep your eyes open to opportunities beyond those discussed here.
