Inflation is the general rise in the price of goods and services, and it's measured by the Consumer Price Index (CPI), which is updated by the Bureau of Labor Statistics each month.
Annualized CPI spent a decade hovering around the U.S. Federal Reserve's 2% target, before surging to a 40-year high of 9.1% in mid-2022. Causes include pandemic-related government stimulus and record-low interest rates. Now, some inflation is good because when consumers expect prices to gradually rise, it entices them to spend money now. Plus, it keeps the workforce's wages growing.
But when prices rise aggressively, it can usher in an economic catastrophe in which consumers simply can't afford everyday goods and services. That's why the Federal Reserve embarked on the most aggressive campaign to hike interest rates in its history over the last 12 months. The good news is it's working: Annualized CPI has declined for 10 straight months since the high in June last year.
With that in mind, here are two companies that were negatively impacted by high inflation and therefore could be great bets as it continues to come down.
1. Amazon
Retailers are on the front lines when it comes to the financial health of consumers, and Amazon (AMZN -0.85%) is one of the largest in the world. Last year, the e-commerce giant's online sales came in at $220 billion, which was 1% lower compared to 2021, and they were flat in the first quarter of 2023. As inflation comes down and interest rates stop climbing, these figures should improve, and investors have an opportunity to buy Amazon stock now at a 40% discount to its all-time high before that happens.
In the meantime, the company has a diverse portfolio of other businesses that continue to generate robust growth. Its cloud computing platform, Amazon Web Services, leads the industry in terms of revenue and offers more solutions than any of its competitors, whether its business customers need simple data storage or advanced artificial intelligence (AI) tools. The segment delivered 16% year-over-year growth in Q1, and while it has consistently slowed over the last 12 months, it's still responsible for all of the company's operating income.
Amazon also has a rapidly expanding advertising business, which saw revenue increase by 20% in Q1. The company has a growing portfolio of digital media assets like Prime streaming, Twitch streaming, and Amazon Music. Its flagship Amazon.com website receives 2.2 billion visits per month and attracts advertising dollars from merchants who want to put their goods in front of a large, qualified audience.
Amazon continues to acquire high-quality content like the rights to live sports such as the NFL's Thursday Night Football, which could become a major driver of ad revenue in the future. Advertising, like e-commerce, is another area that should see faster growth as inflation falls and the economy improves because that will entice businesses to increase their marketing budgets.
Buying Amazon stock is one of the best long-term bets investors can make, but that's especially true when it's trading down so steeply from its all-time high. In the future, the company is likely to dominate even more segments of the tech sector, which will be to the benefit of shareholders.
2. Meta Platforms
I mentioned above that better economic conditions will likely boost the advertising industry, and few companies have suffered more than Meta Platforms (META 0.19%) in this challenging environment. It draws almost all of its revenue from businesses advertising on its massive social platforms like Facebook, Instagram, and WhatsApp, and that revenue declined year over year in each of the final three quarters of 2022.
It returned to sales growth in Q1 2023 not necessarily due to improving conditions, but because it's making significant progress with using new tools like artificial intelligence to optimize its ads for customers. Meta increased efficiency for ads on Reels by 30% on Instagram and 40% on Facebook as AI gets better at curating content and identifying its relevance for specific users. This is critical because Reels was launched in 2020 to compete with TikTok, the dominant player in the short-form video segment.
Meta says about 20% of the content all users see across Instagram and Facebook is now fed to them by AI algorithms. This led to a whopping 24% increase in time spent on Instagram specifically in Q1, and if the trend continues, it will also contribute to an increase in advertising dollars.
On the flip side, Meta received criticism from investors throughout 2022 for its spending, particularly on its metaverse virtual reality project, which generated $13.7 billion in operating losses and brought in just $2.1 billion in revenue. It prompted CEO Mark Zuckerberg to commit to a year of efficiency in 2023, and he's slashed 21,000 jobs since November last year and plans to manage expenses more carefully.
Investors appear pleased with this reinvigorated version of Meta, and sent its stock soaring 87% in 2023 already. If the economy does improve from here, that could really light a fire under the company's growth, so it's not too late for investors to buy shares.
