Many growth tech stocks have suffered from inflation. Rising interest rates have a negative impact on growth stocks as they reduce capital availability and make fixed income investments more attractive.
Some tech stocks have business models that generate higher revenue in inflationary environments, however. These are the names to look for in tech stocks: Amazon ( AMZN -2.15% ), Digital Realty Trust ( DLR -1.51% ), PayPal Holdings ( PYPL -1.56% ).
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1. Amazon
After years of above-average growth, Amazon stock has seen a decline in the last year. This is because consumers have embraced offline shopping again after being locked out for many years.
Amazon can be refocused despite rising inflation for two reasons. One, Amazon’s e-commerce division thrives due to its lower costs. This could appeal to those who are looking to save money wherever they can.
Another money-saving trend is the adoption Amazon Web Services (AWS). To reduce costs, IT departments have always turned to the cloud. This technology is even more attractive due to rising costs.
A temporary slowdown in sales growth could also be a buying opportunity. Net sales rose 22% to $470 Billion in 2021. Income increased 57% to $3.3 billion. The company still expects a dramatic drop in sales, somewhere between 3% to 8%, in the first quarter. Amazon stock has suffered a 8% decline over the past year due to this slowdown.
However, its 48-year-old price-to earnings (P/E ratio) puts its valuation at a multiyear low. This should add to the stock’s appeal, as the growth of the stock protects stockholders from the ongoing inflation storm.
2. Digital Realty Trust
Digital Realty is gaining additional momentum due to inflation. Digital Realty owns properties that are designed to house data centers. These properties offer power availability, climate control, physical security, and power availability.
It has long been a beneficiary of the increasing demand for data center services as IT becomes more cloud-focused. Data center REITs are able to serve as inflation hedges just like other realty-related investments. Real estate generates more revenue as a result of rising rents and higher values due to a relative lack of supply growth, even though the dollar is losing value.
This trend helped to increase revenue by 13% to $4.4 billion in 2021. AFFO income, which is a measure of REIT cash flow, was $6.25 per share. This is an increase of 33% year over year.
The current dividend rate of $4.88 per shares, or a cash return approximately 3.4% at current prices, can easily be covered by AFFO income. Since its inception in 2013, the payout has increased each year. This dividend and the stock price are likely to continue rising as data centers become more important for both the tech and realty industries.
3. PayPal
It seems that inflation could hurt PayPal because consumers want to spend less. It is a business that takes a percentage of transactions. As nominal spending increases, revenue should also rise.
PayPal offers additional features that could be beneficial to consumers in such an environment. Its couponing app Honey allows users to get discounts from more than 30,000 different vendors. The company’s burgeoning buy soon, pay later (BNPL), business is a financing alternative that is not tied directly to interest rate. This means that borrowers could use this option to finance some purchases instead of using credit cards.
The company continues to ride on the fintech wave. Revenue rose 17% year-over-year to more than $25 billion in 2021. This period saw net income drop by 2% to just under $4.2B, but this was due to a dramatic drop in income from strategic investments.
Stock prices have also fallen significantly. The separation from the former parent has been completed eBay Some investors have lost faith in the company due to a greater focus on existing customers than on adding new users. PayPal stock has declined by almost 60% over the past year and has lost all its pandemic-era profits.
Despite the new focus, the company expects to add between 15-20 million and 20,000,000 new users. Its 32-point P/E ratio, which is near record lows indicates a greater likelihood of PayPal making a comeback as it grows.
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