It’s hard to ignore the eye-catching headlines about the 7.5% rise in the consumer price index (CPI) over 12 months from January 2021. The dollar just isn’t going as far as it goes. before, and people across the United States are feeling the pain. With most bank accounts earning next to nothing in interest, there are few places investors can go to protect their savings.
For people who have extra cash that is not needed to pay off debt or be used in the short term, the stock market may be able to provide significant returns despite current economic conditions. Two companies whose stocks have great upside potential are Alphabet ( GOOG 1.39% ) ( GOOGLE 1.33% ) and The trading post (TTD 0.98% ). The market has sold off both stocks recently, providing an excellent buying opportunity for both stocks.
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1.Alphabet
Warren Buffett’s key to investing in times of inflation is finding companies that can modulate their pricing power. Often, these companies offer premium, or best-in-class products that consumers are willing to pay for. For example, two of Alphabet’s divisions, search engine Google and YouTube, massively dominate the market. With an 86% search engine and 76% market share on online video platforms, according to Statista and Datanyze, Alphabet’s platforms offer advertisers a premium product due to the number of eyes they attract. .
During the fourth quarter, Google Search increased revenue from $31.9 billion to $43.3 billion, a year-on-year growth rate of 36%. YouTube is much smaller but still increased its sales by 25% to $8.6 billion. Ad spend was significantly impacted in 2020 as companies cut advertising budgets to meet pandemic-related expenses. With ad spend skyrocketing in 2021, 2022 will provide some tough comparisons. However, if Alphabet flexes its pricing power, it could continue to grow at a similar, ridiculous rate given the size of Alphabet’s revenue streams.
Moreover, Alphabet is very profitable. Throughout 2021, Alphabet’s operating margin was 31% and produced earnings per share (EPS) of $112.20 with free cash flow (FCF) of $67 billion. The stock price is affordable when valued using a price to free cash flow ratio.
Data by Y-Charts.
With Alphabet’s valuation approaching a level last seen during the COVID-19 sell-off in March 2020, along with significant profitability and strong earnings, Alphabet is a solid choice for a stock that can both beat the market and dampen the effect of inflation over the next three to five years.
2. The Trading Post
Another advertising game with a premium product, The Trade Desk provides a demand-side platform for businesses to buy advertising space on connected TV, podcasts and websites. Additionally, with Alphabet’s decision to eliminate tracking cookies, The Trade Desk’s Unified ID 2.0 (UID2) solution is being adopted by businesses as a cookie replacement. It retains user data that makes targeted advertising valuable while respecting consumer privacy – a win-win situation for everyone involved.
Similar to Alphabet, The Trade Desk benefited from an increase in advertising in 2021, with revenue growing 43% to $1.17 billion for the full year. The Trade Desk is a much younger company than Alphabet, founded in 2009. As a result, it continues to expand its reach and establish itself. Most companies like The Trade Desk aren’t profitable, but CEO and Founder Jeff Green emphasized profits early on. For the full year, The Trade Desk’s net profit margin was 29%, almost the same as Alphabet’s.
Since investors perceive The Trade Desk as having a long growth streak, its value is significantly higher than that of Alphabet at 112 times FCF. Much of this optimism stems from UID2 and recently signed agreements. During the fourth quarter of 2021, The Trade Desk’s partnership with walmart began connecting businesses to consumers by advertising specific products that could be purchased on Walmart’s website or in-store.
Image source: Getty Images.
During the fourth quarter earnings call, Green highlighted the success of Bic Company, better known as Bic, as a testament to the usefulness of the co-developed platform. Bic, known for making lighters and pencils, achieved a return on ad spend (ROAS) of 500%, meaning every dollar spent on advertising generated $5 in sales. For reference, Nielsen sets the bar at 270% for a good ROAS. Using The Trade Desk’s analytics tools, Bic was able to determine how the ad translated into increased sales.
With Alphabet and The Trade Desk down 15% and 34% from their all-time highs, respectively, stocks are most likely selling. Both companies have a premium product, which means they can probably raise their prices to generate profits. With the dollar’s purchasing power declining, advertising will only intensify as companies compete for a smaller share of consumers’ money. With the right time horizon (three to five years), every stock has a great opportunity to outperform the market and beat inflation.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.
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