The rate of inflation is measured by the Consumer Price Index (CPI), which tracks a basket of goods and services to determine how much prices are rising (or falling) compared to the same time a year ago. The U.S. Federal Reserve has a goal of keeping the annualized inflation rate at 2%, but economic conditions this year pushed the CPI in June to a 40-year high of 9.1%.
That quick rise triggered an aggressive response from the Fed, which raised interest rates to slow the economy and try to help lower inflation. Meanwhile, consumers are contending with higher prices on lots of everyday items as well as higher mortgage and credit card rates. Together, this has placed a lot of pressure on household finances.
But there is mounting evidence that June's red-hot inflation number might have been the peak, as the CPI has trended down ever since, with the annualized rate in November coming in at 7.1% -- marking a low point for 2022 so far.
If this inflation-easing trend continues into the new year, a long list of companies could benefit, especially those in the consumer products and residential real estate sectors. That's why GoPro (GPRO -0.64%) and Redfin (RDFN -4.71%) are two top stocks that could win big from the trend in 2023.
1. GoPro is unlocking new revenue streams
GoPro suffered from a series of challenges since it was listed publicly in 2014, including the fact that its business selling action cameras and accessories struggled to consistently grow. Since hitting its all-time high of $93.85 a share in 2014, the stock price has declined by 94%.
In response, GoPro has made drastic changes over the last few years by introducing new subscription-based revenue streams that carry a high profit margin, and by expanding its product line to meet the needs of more consumers. Now, although the economy has put further pressure on GoPro's ability to grow its sales, the company has managed to consistently deliver positive earnings, securing its long-term survival.
GoPro offers a $50 annual subscription to its website, giving 2.1 million loyal customers exclusive product discounts, unlimited cloud storage for their videos, and the ability to livestream directly from their cameras. And it has a $10 annual subscription to its Quik camera app, which provides a better experience and more tools than most native smartphone camera software.
The company estimates these services could bring in $100 million in annual recurring revenue from 2023, at a gross profit margin of 70% to 80%, which is double the margin of its camera hardware. Plus, it's set to release new desktop-based editing software next year that will add another subscription-based revenue stream.
Analysts predict GoPro's full-year revenue for 2022 will come in at $1.1 billion, and that it will remain flat in 2023. But substantial upside could be realized if inflation continues its rapid descent, which would kick-start consumer spending in the new year. Considering the company is valued at just $820 million right now -- or less than its sales -- this is a buying opportunity for investors at a rock-bottom price.
2. Redfin is transformed and ready for a comeback
Real estate is one of the last places an investor wants to be when interest rates are on the rise because it typically leads to a weaker housing market. Brokering powerhouse Redfin is certainly feeling that, with its stock down 94% from its all-time high.
But the company made big operational changes this year, including its recent decision to shutter its RedfinNow iBuying business. It involved Redfin purchasing homes directly from willing sellers and attempting to flip them for a profit, which works great in a hot real estate market, but can result in substantial losses when prices are falling. RedfinNow was underperforming so badly that the move to cease operations could be enough to turn its companywide losses into profit on the basis of earnings before interest, tax, depreciation, and amortization.
And the company trimmed costs across the board by shrinking its workforce and focusing on its core business: real estate brokering. It still has 2,293 lead agents servicing 96% of the U.S. population, and that unprecedented scale allows Redfin to charge listing fees of just 1% compared to the industry standard of 2.5%, saving sellers over $1 billion to date.
Despite the tumultuous economic climate this year, the company remains on track to deliver over $2.2 billion in revenue, which would be a 17% increase compared to 2021. The number will likely come down in 2023 as its iBuying business finishes winding down, leaving Redfin with a smaller but far healthier business overall.
The company is valued at just $560 million right now, despite having $470 million in cash, equivalents, and short-term investments on its balance sheet. Plus, its cash balance should improve once the remainder of the properties acquired under RedfinNow are sold.
If inflation truly has peaked and the economy bounces back in 2023, then the risk-reward equation for Redfin stock at current levels presents a very attractive investment opportunity.
