Inflation dominated headlines this week with the Consumer Price Index rising 8.5% in March — its highest year-over-year expansion in 2022 so far. The last time U.S. inflation reached this level was 1981, which shows how unique a position the country is in today.
However, higher inflation is not affecting how I am investing. Even without inflation, finding high-quality companies with durable competitive advantages to hold for decades is critical. Often, these high-quality companies have pricing power — the ability to raise prices without losing customers — which allows them to remain resilient in the face of higher input costs. The companies I bought this week — Airbnb (NASDAQ: ABNB), FIGS (NYSE: FIGS), and Nvidia (NASDAQ: NVDA) — are prime examples, which is why I was excited to add more to my positions.
Trading at 18 times sales as of this writing, Airbnb’s valuation is near the lowest it has ever been as a public company, yet its business is operating at all-time highs. The company provides a hub for unique travel stays, and it saw revenue jump to $6.0 billion in 2021, up 25% from 2019. It was hit hard by the pandemic, but unlike other hospitality companies, Airbnb has already risen above pre-pandemic revenue levels. Additionally, the company expects to have surpassed first-quarter 2019 activity in terms of nights and experiences booked last quarter.
The company’s free cash flow also exceeded $2.1 billion last year, surging from $97 million in 2019. Airbnb can use this cash generation to invest heavily in its platform, which should help the business thrive during this inflationary period. Hosts on the platform may be able to increase prices in line with the inflation the U.S. is seeing today because of Airbnb’s strong brand, allowing the company to enjoy more stable revenue.
Because of the company’s reputation, customers will continue to use its platform to find and book vacations despite these price hikes, which might not be true for other competitors like Vrbo. This puts Airbnb in a great position: Demand for the company can remain stable while competitors face inflationary pressure. While this is not guaranteed, I am willing to put my money on the top dog in the industry.
FIGS is another company with one of the strongest brands in its industry. Selling hospital scrubs for healthcare workers, FIGS has a Net Promoter Score (NPS) — a customer satisfaction score from -100 to 100 with a score of 70 considered “world-class” — over 80. This is higher than the largest apparel companies in the world, even Nike, which only has an NPS of 52.
This impressive brand has allowed the company to demand a pretty penny for its products. In 2021, FIGS’ gross margin was nearly 72%, something unheard of for apparel companies. Therefore, FIGS is in a great position: It can either keep its prices the same and still enjoy strong margins, or it can raise its prices to combat inflation, likely retain the majority of its customers, and keep its lead over competitors.
No matter what the company does in the short term, the long-term outlook for FIGS is very bright. By 2025, it expects to have $1 billion in annual revenue, which represents compound annual growth of nearly 25%. FIGS will face some inflationary pressure, but it still looks positioned to succeed over both the short and long term.
If you believe that artificial intelligence, gaming, self-driving, and the use of data are going to continue growing over the next decade, Nvidia is one of the best places to invest today. The company makes semiconductor chips that are necessary for these industries to thrive, and instead of picking the best horse in each race, you can bet on Nvidia — whose chips are the gold standard and used around the world.
Nvidia’s dominance can be seen in its financials. Revenue soared 61% year over year to nearly $26.9 billion in its fiscal year 2022, which ended Jan. 30. Additionally, the company’s free cash flow surpassed $8 billion for the year, up 72%.
The company’s valuation is high at 20 times sales, but its opportunity is even bigger. It has massive addressable markets, including $150 billion in artificial intelligence software, $100 billion in gaming, and $300 billion in the enterprise computing space. As the company continues to generate cash, it can keep investing in its product pipeline. This will allow it to capitalize on those huge markets, which is why I am bullish on Nvidia for the next decade.
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