Want to know why stocks are falling big in 2022? Inflation.
Stocks didn’t start to collapse until it became abundantly clear that the U.S. government and central bank had completely lost control of inflation.
Throughout 2021, inflation pressures were building. But that entire time, the government and central bank were telling us not to worry about it, so we didn’t.
The word of the year was “transitory.” Inflation was going to be transitory.
But in 2022, we got proof that wasn’t the case. Instead, inflation has accelerated significantly all year long. And while government officials and central bankers have apologized for getting it “wrong,” investors are paying the price as stocks being crushed!
Well, I say enough is enough! It’s time to fight back against inflation.
The reality is that while inflation is certainly a massive headwind for the U.S. economy, there are certain types of stocks that can weather this kind of environment – and even thrive during them.
These stocks typically share a few common characteristics:
- They’re high-margin stocks. Inflation-beating stocks tend to lie with businesses that have 70%-plus gross profit margins. That’s because those high gross profit margins enable them to absorb higher operating costs yet still produce tons of profits and cash flows.
- They have pricing power. Inflation-beating stocks also tend to have strong pricing power. Those companies can pass on some higher input costs to customers without demand being impacted.
- They’ve created technical competitive moats. Inflation-beating stocks are normally protected by technical competitive moats – i.e. the company has tons of patents or better technology or strong network effects. This is because those moats are cost-proof, so no additional investment is required to protect the business from an inflation-driven demand slowdown.
- They have durable demand drivers. Inflation-beating stocks are also typically supported by durable demand drivers that will continue to drive healthy revenue growth despite any price elevation for customers.
- They have fortress-like balance sheets. Higher inflation means higher interest rates, which means higher debt costs. Companies with tons of cash on the balance sheet typically don’t need to rely on debt markets to fund growth and, consequently, are shielded from the rate increases that accompany higher inflation.
To that end, if you’re looking to beat inflation in 2022, you need to find some high-margin stocks with tons of pricing power, technical-based competitive moats, durable demand drivers, and cash-heavy balance sheets.
Those are the inflation-beating stocks you want to buy today to weather this storm – and thrive after it passes.
Fortunately, we’ve put together a list of the best-of-the-best of those stocks for you right now.
So, without further do, let’s take a look at the seven best stocks to buy today to beat inflation!
Snap (SNAP)
Snap (SNAP) is yet another social media company that’s benefitting from visual media tailwinds, as the company operates the world’s best instant picture messaging app at a time when consumers increasingly want to communicate via pictures.
Beyond that, Snap is relentlessly innovating to expand its value prop from visual communication app to all-in-one entertainment platform, complete with games and original shows. These expansion efforts should be successful and will create what’s shaping up to be a very bright future for this company full of big user, revenue, and profit growth.
However, after disclosing it would miss second-quarter financial targets, shares of the social media company dropped more than 40%. And unbelievably, we think this is a golden buying opportunity in Snap stock.
What’s going on with Snap is not unusual.
Traditionally, the advertising markets are a bellwether of the global economy.
When the economy is strong, advertising spend is strong. When the economy is weak, advertising spend is, too.
This was true in the aftermath of the cot-com crash in the early 2000s, which spilled into a recession. It was also true during the 2008 financial crisis. And, of course, it was true during the outbreak of the COVID-19 pandemic in 2020.
When the economy slows, advertising spend drops.
The drops usually aren’t big, nor do they last long. They are, however, noticeable.
That said, the big-picture bull thesis on why to buy the dip in digital ad stocks is very simple.
- Ad recessions aren’t that big, and they don’t last long.
- Digital ad stocks are valued at record-low valuations.
- Once this ad recession ends (soon), digital ad stocks will rebound (big).
The Snap stock bull thesis follows a similar logic. But it’s much more than just “buy the dip in SNAP because the stock is cheap its ad trends will rebound.”
Snap is the leader in the next generation of the internet.
We’re amid an enormous shift from a 2D to a 3D internet. That is, the internet of the last decade was all about consuming 2D images and videos via screens. And the internet of the next decade will be all about consuming 3D images and videos via immersive augmented reality environments.
Today, we’re in the early innings of this transition.
And Snap is at the forefront in the social media space.
Sure, Meta talks a big game. But the reality is that what Meta is building – a metaverse where we all play ourselves as digital avatars – is not the future.
Instead, the future will be an integration of augmented reality technologies that enhance our physical experiences, not replace them.
Snap is building that future.
The company is creating a suite of AR tools to enhance a consumer’s physical experiences, starting with a focus on enhancing the shopping process.
For example, Snap’s new “Try-On” filters allow consumers to try on clothes virtually through their smartphone cameras. Prada (PRDSF) is using these filters to allow prospective buyers to see what their bags would look like virtually hoisted around their shoulders. Gucci (PPRUY) is using these filters to allow consumers to “try on” their glasses. And Farfetch (FTCH) is using them to allow consumers to “try on” full outfits.
This is the future of shopping.
Instead of browsing static 2D images of apparel when shopping online, customers will leverage AR technology to virtually try on outfits, shoes, bags, makeup, glasses, and more. The consumer will buy the stuff that looks good.
This will radically improve the shopping experience, drive higher conversions, yield lower returns, and ultimately make for happier shoppers and merchants.
And Snap is at the epicenter of this future. Specifically, it’s building the core technology – AR software that creates products’ 3D virtual replicas that can be placed on any object in a camera’s purview – that will facilitate this future.
This is special technology. It’s game-changing, and Snap knows this. So, it doesn’t just want to keep this tech on its platform and forever remain a niche social media company. Snap has opened up this technology to be used by merchants on their own websites.
To that end, Snap is only a social media company for the time being. But by 2030, this will be a social media company that’s also a B2B AR software solutions provider to the entire fashion industry.
And by then, we see every major retailer – Nordstrom (JWN), Amazon (AMZN), Walmart (WMT), Urban Outfitters (URBN), Nike (OF), and more – using Snap’s AR filters.
So, I repeat: Snap stock is a fantastic long-term investment opportunity. You’re not just buying a popular social media operator with a burgeoning digital ad business. You’re buying the future of shopping.
And that future of shopping is on fire-sale right now.
Bottom line: We see enormous potential in Snap stock over the long term. While it recently hit headwinds entirely brought on by uncontrollable macro issues, we think those will pass within a quarter or two. And we see ARPU growth rates normalizing by the back half of the year.
Meanwhile, Snap’s filing implies that DAU growth trends remain on track. And we continue to be impressed by the company’s leadership in hardware innovation (the new Pixy drone is very cool) and software innovation (Lens Cloud + augmented reality Shopping are long-term game-changers in our opinion).
We strongly believe digital content is in the preliminary stages of its generational shift from 2D to 3D content, and it’ll be just as large as the shift from analog to 2D digital content. In our opinion, Snap has created the best platform and the best tools to capitalize on this change. Consequently, we see enormous long-term potential in this name.
The stock is now dirt-cheap at just ~4X 2022 estimated sales. On the assumption that the sales base grows by more than 20% per year for the next decade – and margins improve dramatically due to the inherent high margins of a digital ad business – we believe Snap stock is a buy at current levels.
Unity (U)
Unity Software (U) is the world’s leading platform for creating and operating interactive, real-time 3D (RT3D) content.
The world is shifting from 2D to 3D content creation and consumption. We used to interact with digital media through 2D screens. Now, we’re increasingly interacting with digital media through immersive 3D experiences.
This shift is still in its early stages. It is starting with gaming, where gamers are going from playing games on consoles to putting on headsets and playing in 3D virtual environments. But it is extending into many more industries, as well, such as construction, architecture, engineering, production, advertising, and even self-driving, where companies are using 3D content to simulate real-world experiences.
All this 3D content needs to be created and operated by a RT3D engine. Unity operates the world’s leading end-to-end RT3D content engine.
Specifically, the company operates two business segments: Create and Operate.
Through its Create platform, Unity gives companies the best tools to develop RT3D content. The company essentially provides a suite of software tools that enable companies to create, edit, and render virtual environments.
Through its Operate platform, Unity gives companies the best tools to operate and monetize that content. The company provides a suite of mostly ad-targeting tools to help app developers and content creators monetize their platforms.
In short, Unity is creating the “picks-and-shovels” for the RT3D content megatrend.
This is a company that has historically averaged revenue growth rates north of 30% per year. Management expects to keep growing the business at this cadence for several years to come. The company’s gross margins hover around 80%.
This stock used to be a high-flier darling on Wall Street. But it has come crashing down over the past few months amid the tech sector meltdown. And after the company reported disappointing earnings, it took a particularly large beating yesterday.
We believe RT3D content will become ubiquitous. In short, all 2D digital content you see today will be replaced by 3D digital content over the next decade. As the world shifted from analog content to 2D digital content, the company that provided the tools for 2D content creation was Adobe (ADBE). Unity will be its next generation – the company that provides the tools for 3D content creation as the world shifts from 2D to 3D digital content.
Adobe stock has been an enormously successful investment over the past 10 to 15 years. In fact, it has been one of the best investments on Wall Street over that period. And we think Unity stock could be one of the best investments on Wall Street over the next 10 to 15 years.
The company has huge and highly defensible competitive moats around its Create and Operate businesses. Specifically, we are attracted by the company’s first-mover advantage in the RT3D industry, which enables the company significant data and product advantages over new entrants.
Management strongly believes this will be a 30% annual compounder on the topline over the next five to 10 years. We agree. The business model is highly scalable with very high gross margins and very low capital intensity. That means that at scale, Unity should generate huge profits with huge cash flows.
Given the secular tailwinds in RT3D content creation, we think it is entirely possible that Unity grows at 30% per year over the next 10 years. Revenues this year are expected at $1.4 billion. Assuming a 30% 10-year CAGR, revenues in 10 years will be almost $20 billion.
Unity’s business model is similar to Adobe’s. And since Adobe runs at 40%-plus operating margins, that seems like a doable long-term target for Unity. Assuming so – and further assuming a 20% tax rate – then net profits in 10 years could round out to $6.5 billion. A 20X price-to-earnings multiple on that implies a long-term valuation target of $130 billion.
The current dot-com-style crash on Wall Street is entirely warranted. There were certain hypergrowth stocks out there that became overhyped during the pandemic, and they deserve to be crushed right now. However, Wall Street is not differentiating between the overhyped and the high-quality hypergrowth stocks that actually deserve their premium valuations. Everything is falling in equal magnitudes, regardless of quality. This indiscriminatory selling is creating a huge opportunity. Investors are throwing the baby out with the bath water. Don’t chase after the bath water. But do chase after the baby. History shows that buying the right high-quality tech stocks during market meltdowns is a genius investment strategy. Unity stock at $40 is like Amazon stock at $5 in 2001, or Apple (AAPL) stock at 20 cents. This is nearly that good of an opportunity.
DataDog (DDOG)
Datadog (DDOG) is a leading observability software provider that we see as a “unicorn” in this market. It’s the rare combination of being both a very promising firm in the early stages of long-term compounded growth and a high-quality tech enterprise with already-big profit margins and sizable revenues.
The story here is simple.
Every company is fully embracing their digital transformations. That means they are all adopting digital tools and services to modernize their business. That’s great — but it’s also a lot to manage. And to optimize the utility of those services, businesses need to make sure they’re healthy.
Insert observability software. It allows companies to make the most out of their digital transformations by providing tools and analytics to help observe and monitor the health of enterprise software stacks.
Observability tools are relatively niche today, but companies who use them see a significant boost in productivity. We believe that as companies fully embrace their multi-faceted digital transformations and adopt various enterprise software tools, observability software will become an enterprise ubiquity.
The growth potential in this industry is enormous — and Datadog is the unrivaled leader in this space, with market-leading software and a ton of customers who are increasing their spend on the platform every year because it works so well.
Observability is a very underrated and undervalued component of the enterprise digital transformation stack that we ultimately view as the unifying software that makes it all work. We believe observability software spend will witness significant growth over the next 10 years.
Per our research, Datadog is the “top dog” in this space. Gartner reviews on the product are extraordinarily strong, and every data scientist we’ve consulted with spoke very favorably of the platform. Not to mention, the company has great revenue retention rates, which speak to the reality that current customers are rapidly growing their spend.
In 2022 specifically, we think Datadog stock will benefit from an exceptionally favorable IT spending backdrop and a shift in focus toward building out observability capabilities as businesses adopt more digital transformation tools.
The company is also cash-rich, high-margin, and profitable — attractive traits in this defensive market. Long-term, we see Datadog as a 30% compounded revenue grower, which would put revenues at over $20 billion within 10 years.
The stock market will remain very volatile over the next few weeks, but that volatility creates opportunity. And currently, we’re starting to see a lot of great opportunities emerge. We think now is the time to begin getting more aggressive as prices continue to fall. And at the top of our “buy the dip” shopping list is Datadog — a massive long-term winner to get at a discount. We think you should consider adding it to your list, too.
Roku (ROKU)
In early 2019, I made a bold call that seemed totally counterintuitive at the time. I told investors to buy the dip in Roku (ROKU) after the streaming player’s stock had crashed in December 2018.
Amid the collapse, most investors were running away from Roku. But I was running toward it.
Specifically, I wrote:
“Roku is a true growth stock with a powerful underlying secular growth narrative. In late 2018, while ROKU dropped more than 50%, the market forgot that. But it won’t forget that forever. As such, while the broader market suffers from short-term memory loss, this is an opportunity for investors to pick up a growth stock at a value stock price.”
Take a look at what happened to Roku stock over the next two years.
It soared 850% — next to a measly 50% gain for the S&P 500. Investors who followed my call back then had the chance to 10X their money in two years.
Well, folks, history is repeating itself.
Today I am seeing another dip-buying opportunity in Roku stock that is just as compelling — if not more so — than the one I identified in early 2019.
On Friday, Roku stock crashed more than 20% after the company reported ostensibly dismal fourth-quarter earnings. Account growth and engagement growth are slowing. Unit revenue growth and total revenue growth are stalling. Gross margins are compressing. Profits are declining.
Every key performance metric of the business is going in the wrong direction. Investors panicked, and the stock crashed.
It makes sense.
However, with Roku stock falling 80% off its recent highs this year — its biggest drawdown ever — I’m feeling a golden buying opportunity.
The reality is that all of Roku’s KPIs are trending in the wrong direction for one very simple reason — the supply chain crisis.
It’s limiting the production of TV-makers across the globe, leading to lower TV sales everywhere. This is hurting Roku’s account growth. At the same time, the product Roku can acquire and sell is coming with significantly higher input prices. And Roku is refusing to pass those prices onto consumers, so margins are falling. Meanwhile, its advertisers are spending with less velocity because they, too, don’t have enough supply to satisfy demand. Therefore, they’re not spending as many ad dollars to chase incremental demand.
It’s all supply chain driven.
So, if the crisis improves throughout 2022, all of Roku’s KPIs should recover.
And that’s exactly what will happen.
The current supply chain crisis is mostly COVID-related. Governments instituted strict quarantining and social-distancing policies in response to the pandemic. And these greatly limited the production capacity of manufacturers. However, those policies are now changing, as the governments are amending their responses from “we have to eliminate COVID” to “we have to learn to live with it.” As governments more broadly embrace this “live with COVID” ethos in 2022, quarantining and social-distancing policies will disappear. Manufacturing output will improve, and supply chain pressures will ease.
And so, with respect to Roku, that means that TV-makers will dramatically increase their output this year. Input prices on TVs and streaming sticks will fall, and advertisers will re-up spending as their own supply rebuilds.
As all that happens, Roku’s account growth, revenue growth and profit margins will all shift higher.
This propulsion will converge on a super-cheap valuation in Roku stock. Simply consider: Roku is worth less today than it was worth before the pandemic. Yet, relative to its pre-pandemic levels, Roku has 60% more users, 145% more revenues and 13X the EBITDA.
It makes no sense.
And because it makes no sense, the 2022 rebound rally in Roku stock will be especially large. Before the year is out, we will see prices on Roku stock of $200 or even $300.
The time to buy is now.
Alphabet (GOOG, GOOGL)
In the investment world, it’s easy to get caught up in the day-to-day noise. But a lot of that noise amounts to nothing more than irrelevant distractions that do not materially impact the big picture. As such, when investing, it’s often best to take a step back to see the forest for the trees.
When you do that with Alphabet (GOOGL, GOOG) stock, it becomes obvious why investors are optimistic about it in the long run.
Specifically, this company has been and projects to remain the backbone of the world’s most used and valuable public good — the internet.
As the internet’s backbone, Alphabet is at the epicenter of the secular growth digital ad market. This will keep growing at a healthy pace over the next several years, and Alphabet will remain the dominant player. At the same time, Alphabet has multiple tangential growth drivers — data centers, self-driving, smart home, cloud gaming, etc. — which will help support robust revenue and profit growth for a long time.
As revenues and profits trend higher in the long run, so will GOOGL stock.
Consequently, I remain bullish on Alphabet stock for the long haul. The fundamentals are simply too good to pass up on, and the valuation leaves plenty of room for big upside over the next few years.
The first part of the long-term bull thesis on Alphabet stock – this company’s long-term fundamentals and growth prospects are highly favorable.
Although history is not a clear indicator of the future, it is important to see what Alphabet has done over the past decade and to see where it may go over the next. Consider the following:
Alphabet’s revenues have risen at a 20% compounded annual growth rate over the past decade, faster than the global digital ad market’s ~16% growth rate during that same stretch (from 2008 to 2018). The company’s operating profits have risen at a 17% compounded annual growth rate over the past decade, inclusive of 2018’s depressed margins. GOOGL stock is up more than 400% over the past decade.
That’s an impressive track record of consistent and robust revenue, profit, and share price growth. And it lays the groundwork for continued success over the next several years.
As global consumption continues to pivot into the digital channel, the digital ad market projects to keep growing for the foreseeable future. Despite rising competition, Alphabet projects to remain the global leader in that market. That’s mostly because YouTube and Google Search are irreplaceable titans in the digital ecosystem.
Beyond digital ads, Alphabet’s cloud business will continue on its rapid growth trajectory. A continued surge in data volume globally will translate into increased data-center usage. The hardware business will gain traction with new products like Google Stadia. And once self-driving taxi services become a real thing, its self-driving Waymo business will start to produce meaningful revenue.
The long-term outlook supporting GOOGL stock remains broadly robust.
When it comes Alphabet, the best thing to do is take a step back and see the forest through the trees. When you do that, it becomes clear that all this digital ad regulation, big tech break-up, compressing margins, and slowing growth noise is just … well, noise.
In the big picture, Alphabet is the backbone of the internet, at the epicenter of a secular growth digital ad market. And it’s supported by multiple tangential growth drivers in cloud, hardware, and self-driving. That big picture translates into one simple fact: Revenues and profits will move meaningfully higher over the next five years.
And so will GOOGL stock.
Adobe (ADBE)
Adobe (ADBE) stock — alongside essentially every other large-cap tech stock in the market — has plunged in 2022, with shares falling as much as 35% year-to-date.
Although that may seem like a big selloff, context is important here. Coming into 2022, ADBE stock was up nearly 50% year-to-date. Even after this recent plunge into correction territory, shares are still up more than 160% over the past five years.
Contextualizing the recent selloff in ADBE stock in this way allows us to see it more rationally as nothing more than a minor near-term drawback in a longer-term uptrend.
To that extent, near-term weakness in Adobe stock is little more than a longer-term buying opportunity.
Here’s a deeper look.
The COVID-19 pandemic has forced every enterprise of every shape and size, from every industry and geography, to digitize.
And as companies continue to embrace the digital economy and make the shift to become faster, more efficient digital-first organizations, this mass digitization wave will redefine corporate spend and investment over the next decade.
Adobe provides various top-tier products and services that will help facilitate this transition.
The company’s Creative Cloud solutions will help organizations create more digital and visual media products, services, and marketing campaigns, as their customers learn about and engage with their products more and more through digital funnels.
Adobe’s Document Cloud solutions will help organizations with their paper-to-digital transformations, making pen and paper obsolete and turning digital document management processes into a ubiquitous reality.
The Experience Cloud will help organizations build robust digital CX ecosystems through various AI-driven, digital-first marketing, advertising, and commerce solutions.
Overall, demand for Creative Cloud, Document Cloud and Experience Cloud solutions will boom amid the mass enterprise digitization wave that is rippling – and will continue to ripple – across the world for the next few years.
As that happens, Adobe will sustain robust revenue and profit growth — and ADBE stock will keep charging higher.
The biggest reason to buy ADBE stock on the dip is that it’s undervalued relative to the company’s robust long-term growth prospects.
Thanks to secular demand tailwinds and the company’s huge addressable market, which management pegs at roughly $130 billion, Adobe reasonably projects as a 10%-plus revenue grower for the next several years.
At the same time – by virtue of being a software business with very little formidable competition across its three major operating verticals – Adobe will continue to benefit from big gross margins (~90%) and tons of positive operating leverage with increased scale. Of course, that means profit margins will continue to expand for the foreseeable future.
This combination of 10%-plus revenue growth and profit margin expansion paves the path for Adobe to grow earnings at 15%-plus clip for the foreseeable future.
Don’t overcomplicate things.
Adobe stock is a long-term winner, and nothing that has happened in 2022 changes that fact.
So, buy the dip with the stock down in correction territory.
GitLab (GTLB)
GitLab (GTLB) is a software company that has developed a next-generation platform that unifies the entire DevOps process.
The platform is called — perhaps unsurprisingly — The DevOps Platform. It is a single application that brings together development, operations, IT, security, and business teams to deliver needed DevOps solutions.
This platform is unique from legacy DevOps techniques, which are usually siloed by team. GitLab believes such siloes result in wasted resources that are dedicated to communication and record-keeping. To resolve this, the company has put the entire DevOps process into one platform for use by all teams, from business executives planning a software application, to developers creating the application, to security teams defending it.
GitLab’s “bread and butter” is its Create solution. This allows developers to collaborate on the same code base without accidently conflicting with or overwriting each other’s changes.
And it simultaneously maintains a running history of software contributions from each developer to allow for version control.
GitLab usually lands a Create contract with the development team at an organization, then leverages success therein to cross-sell other teams to the entire DevOps Platform. This is its “land-and-expand” model.
The company currently has 5,168 customers with more than $5,000 of annually recurring revenue, and about 545 customers with $100,000 of annually recurring revenue. Those customer counts are growing at a ~65% year-over-year pace. Revenues this year clocked in around $252 million, up more than 60% year-over-year.
The DevOps market has enormous growth potential. Various market research firms peg the market as growing by ~20% to ~30% per year throughout the 2020s. GitLab is one of three premier players in the DevOps market, alongside BitBucket — owned by Altassian (TEAM) — and GitHub — owned by Microsoft (MSFT).
Since its two main competitors are owned by bigger tech companies, GitLab projects to remain the only pure-play on DevOps for the foreseeable future.
This is a very high-gross-margin business that runs on annually recurring software revenues. Gross margins regularly clock in around 90%. GitLab is also a very low-expense business because its workforce is 100% remote. The company doesn’t even have an office. To that end, operating expenses are relatively small for a software company. And capital expenditures are basically zero – creating a situation where, at scale, GitLab could be enormously profitable with huge cash flows.
Further, the engineering team at GitLab is very impressive, and the company’s Glassdoor ratings are superb – meaning that the company is keeping its smart people very happy. The stock has been crushed and now trades below its IPO price.
As stated earlier, we see the DevOps market growing to $100 billion by the end of the decade. We believe GitLab can nab about 10% of the market. We believe, at scale, this will be a 90% gross margin company with a relatively muted opex rate around 40%.
That implies operating margins of 50%, which would turn $10 billion in revenue into $5 billion in operating profits. After taxes, that should translate into $4 billion in net profits. A 25X multiple on that implies a long-term valuation target of $100 billion.
We love the DevOps market as an investment opportunity for the 2020s. In that market, you have three big players. Only one of them, GitLab, is a standalone public company.
Therefore, if you’re looking to play the DevOps market in the 2020s, GitLab is your only option.
Best regards,
Luke Lango
Senior Investment Analyst
