- Regeneron’s successful operations have allowed it to make some critical decisions.
- Adobe’s stock has dropped more than 30% this year, but the company’s business fundamentals are sound.
- Visa has long been a dominant player in its industry, with high-profit margins and more than half of its revenue going toward profits.
In the current economic climate, stocks that can absorb inflation make excellent investments. The high margins of the following companies provide more wiggle room to handle adversity and rising costs. Moreover, it’s challenging to remain in the black if a firm’s cost of revenue is high and leaves little of the top line for overhead and other operating expenses.
One of the most telling is Amazon (NASDAQ:AMZN), which has a cost of sales ratio of 80% or more. Last quarter, when it battled growing expenses, it recorded its first loss in years.
These firms don’t have that issue, and their gross profit margins are typically over 80%. These three stocks that can absorb inflation are Regeneron Pharmaceuticals (NASDAQ:REGN), Adobe (NASDAQ:ADBE), and Visa (NYSE:V).
This year, sales for biotech firm Regeneron will decline. It won’t receive a considerable boost from its COVID-19 therapy, which isn’t as effective against the omicron version. However, the firm has been considering different strategies to build and diversify its business.
Regeneron has made several acquisitions in recent months. One was to purchase immuno-oncology company Checkmate Pharmaceuticals for $250 million. It also bought out Sanofi‘s (NASDAQ:SNY) stake in cancer treatment Libtayo for $900 million, plus possible royalties and milestone payments in the future. These deals will help increase Regeneron’s revenue (in the case of Libtayo) while also growing its pipeline; for example, vidutolimod is a promising cancer drug undergoing phase 2 testing from, Checkmate.
If Regeneron wants to speed up growth and make up for COVID-19 revenue, it will have to invest more into its business. Its COVID-19 revenue totaled $5.8 billion in 2021 and accounted for 36% of its top line. But the healthcare organization is in excellent shape to do so because it maintains a tight operational style. As a result, its gross profit margin is consistently above 80%, even before the pandemic. This allows Regeneron to report earnings regularly. Furthermore, with solid margins, it has plenty of wiggle room if its costs start rising suddenly.
Adobe, a software company, benefits from a largely subscription-based business that maintains high margins. The firm’s sales have increased by 12% year over year to $8.6 billion during the six months ending June 3. Subscriptions accounted for more than $8 billion (93%) of that amount.
Subscriptions combined with digital items make it very simple for Adobe to maintain a high-profit margin – its gross profit margins are 88% of sales. In addition, Adobe’s brand is well-known worldwide, which is one of the reasons for its success. When someone uses a brand as a verb, like “Photoshopped image,” you can tell that brand is popular. As a result, Adobe doesn’t need to spend much on marketing and sales to grow its business and increase revenues. In essence, its goods sell themselves.
Adobe reported a net income of $2.4 billion over the past two quarters, up 2.8% from last year’s comparable period. It isn’t great, but it’s an acceptable result considering inflation. Adobe’s digital-centric business should be less impacted by inflation than other segments; however, its strong margins should ensure its bottom line remains robust even if costs rise.
Another well-known firm is Visa. Its credit cards are accepted worldwide, and its fees are modest. The company’s gross margins of 80% are remarkable. Most of the company’s primary expenditures to drive revenue growth are personnel costs and networking and processing expenses, totaling $2.7 billion in the last two quarters. That’s less than a fifth of Visa’s $14.2 billion income during that period.
The firm will encounter difficulties this year owing to the Ukraine conflict. In April, Visa and other major card issuers announced that they were halting operations in Russia due to the country’s actions. As a result, when the firm releases earnings, a drop in sales may drag down its numbers. On the other hand, a rise in pent-up travel demand and spending this year might help offset those declines.
Regardless, Visa is in an excellent position to weather the storm. Whether due to geopolitical issues, inflation, or economic uncertainty and worries of a recession, Visa is clearly one of the three stocks that can absorb inflation.