Investors should always consider many factors before buying a stock, but in today’s inflationary climate, the pricing power of the company may be one of the most important. In this segment of Backstage pass, recorded on January 14dork contributors Rachel Warren and Toby Bordelon discuss two companies that have insane pricing power right now and can continue to win for investors over the long haul.
Rachel Warren: I agree I think pricing power you don’t really need to look any further than what we see netflix do here. It’s funny because I’m a longtime subscriber and for some reason already thought the base plan was $9.99. [laughs] So for me, it won’t be a big change.
When I think of companies that have pricing power — basically the ability to raise their fees, raise the cost of whatever product or service they sell, and still be able to retain their customer base — I think part of that could potentially be see with businesses that are more essential retailer-status businesses that you saw earlier in the pandemic.
For example, some of these large retailers like Costco – people will continue to shop at Costco no matter what happens with the market or the economy because Costco provides the key products people need.
But beyond that, a company that I’ve thought about a lot — which I strongly believe has a lot of pricing power because of the services it provides, and because it’s a company that knows such enormous growth — is Shopify (NYSE: SHOP). This is a business that earns money through fees, such as payment processing fees, such as revenue from merchant solutions, or subscription fees. It could raise those prices just a bit if needed, like what we’ve seen Netflix do here.
An extra dollar a month really isn’t going to be a big deal for most people, but you aggregate that over all of that company’s customers and that growing customer base, and that’s a lot of profit and revenue for a company like Shopify.
I also think companies like Shopify that operate in this software-as-a-service space – and specifically Shopify, as an e-commerce giant – are really well prepared to deal with an inflationary environment because a lot of the overhead costs that you might see with other companies that have a more physical product that people buy, those costs just aren’t there. I think that gives a company like Shopify a lot of leeway.
For example, right now, their basic plan — let’s say you want to start an online store on Shopify, and you just want to do their basic plan. It’s $29 per month. Let’s say they decided we’re gonna raise that $1 [to] $30 per month. This won’t be a big deal for most merchants on the platform.
Obviously there are different tiered accounts, but I think if you’re looking for a company that can operate very well in an inflationary environment and has that pricing power, some of those software companies that don’t treat the same kinds of costs because businesses that sell visible products are, I think, a great place to look, and Shopify is definitely one of them.
Toby Bordelon: Another great recommendation there, Rachel. I like what Connor was talking about brand power, that it can drive price power. You think of brand power, I think of disney (NYSE: DIS), which is a company with a big brand. I think they have several ways to raise prices, and people would just, well, not fine with, but they would pay them.
Like theme parks: Prices have gone up at theme parks this year as people return, and they’re still controlling capacity to some degree. They seem to have had no problem with it, as far as I can tell. It’s partly out of necessity because their labor costs are going up, so they have to get [prices] at the top. But it is also because there is just an accumulated demand that they are able to do it.
You are thinking of Disney+. If Netflix can hit $20 a month at its all-time high, I have to feel like Disney+ may at some point start raising its prices even a little more. They made a raise not too long ago. I think a dollar. Although I don’t think their package grew when they did that.
You could think of them both increasing the bundle and even increasing the main Disney+ product. Especially now they seem to be hitting their stride with a Marvel release and a star wars Release. It gets pretty good there in terms of original content. You also think of the cinema.
They don’t control how much the consumer pays when you go see a movie at the cinema, but generally they split their revenue 50/50 with the cinema. They can start pushing it even more, saying, “We’re going to get 60%, we were going to get 65%.” Then the theater owner responds by raising the price to keep his income stable.
When you look at the box office success of their latest release, the Spider Man movie. They have content that people want in their theaters — theater owners, to attract people. You can definitely see this as an opportunity for them, so that’s the one that comes to mind.
[Editor’s note: Spider-Man: No Way Home was a Sony Pictures release, not a Disney release. Disney contributed 25% of the production budget, and will receive 25% of the film’s profits.]
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