There are a lot of mysteries in the stock market right now, but one thing is clear: The Federal Reserve is intent on raising interest rates and keeping them elevated until inflation approaches its long-term target of 2%, well below its current level above 6%.
In its December forecast, the central bank said it expected the benchmark federal funds rate to finish 2023 between 5% and 5.25%, 50 basis points higher than it is currently. The recent hotter-than-expected personal consumption expenditures report and a strong January retail sales report make it more likely that the Fed will hike interest rates by another 25 basis points at its meeting on March 22.
Growth stocks have been hit hard by aggressive rate hikes as higher interest rates make long-dated earnings worth less, but not every high-growth stock is in the line of fire. Some actually benefit from rising interest rates. Here are two that look especially promising in today's high-interest rate environment.
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1. Airbnb
Airbnb (ABNB 1.17%) is best known as the pioneer of home-sharing, a market it now dominates. It's synonymous with home-sharing as a noun and verb that means staying at the home of a stranger, and that leading position has made the business highly profitable as it collects commissions while hosts do the work of receiving guests and maintaining their homes.
In 2022, the company posted a 23% net profit margin, a reflection of the strength of its brand and business model, but there's another valuable component of Airbnb's business model that is mostly overlooked. The company collects interest on the money it holds between guest bookings and stays, and that has become a powerful revenue stream as interest rates have risen.
In the fourth quarter, the company earned $103 million in interest income, nearly half of the $235 million it made in operating income, though the fourth quarter is a seasonally slow period. At that run rate, the company would bring in more than $400 million in interest income. It could be significantly higher than that this year, as the Fed hiked rates by 125 basis points in the fourth quarter and has already raised them by another 25 basis points in the first quarter.
Additionally, the funds it holds on behalf of customers, or what it earns interest on, will increase as the platform continues to grow. Given that rates are still rising and the fourth quarter is its seasonally slowest period in gross booking value, the company could earn well over $500 million in interest income this year.
That's essentially free profit that it can use to reinvest in the business or buy back shares, giving Airbnb an advantage over peers who can't earn interest like that.
2. Bill.com
Bill.com (BILL 0.24%) is a software-as-a-service (SaaS) company that specializes in automating payments for small and medium-sized businesses (SMBs). It eliminates much of the back-office accounting and billing work around accounts receivable and payable, and the company has grown quickly, both organically and through acquisitions.
Like Airbnb, Bill.com also benefits from collecting interest on the money it holds in between collecting payments and disbursing them. The company refers to this as float revenue.
In its fiscal second quarter, its most recent period, Bill.com brought in $28.9 million in float revenue, which made up 11% of its total revenue of $260 million.
Float revenue for Bill.com was minimal until the last two quarters, as benchmark interest rates were near zero. However, that quickly changed as rates rose.
Management said it's capitalizing on the opportunity and that it's "leveraging our float revenue to invest in long-term strategic opportunities."
Guidance for the current quarter calls for $27 million in float revenue, a slight sequential decline, and it sees $100 million for the full fiscal year, which compares to just $9 million in float revenue in fiscal 2022.
While Bill.com is still unprofitable on a generally accepted accounting principles (GAAP) basis, that excess float revenue is helping it narrow the gap and will be a significant boon over the longer term if rates remain elevated.
Why it matters
Neither of these companies talks about their interest income much. It's not a core part of the business the way it is for, say, a bank, and it doesn't seem to factor into their strategy. However, interest income is a valuable byproduct of the success of the underlying business, and it shouldn't be ignored, especially as more investors seem to believe that zero-percent interest rates aren't coming back.
In such an environment, collecting interest is a valuable revenue stream, and fast-growing companies like Airbnb and Bill.com should see that line item increase over time.
While that shouldn't be your first or only reason for owning these stocks, it's an extra incentive to invest in them, especially at a time when higher rates are threatening their growth stock peers.
