If I had to pick key areas of concern for stock investors today, inflation would probably be near the top of my list. An increase in prices can erode consumers’ confidence and their ability to pay for products and services – while also causing interest rates to rise, thus discouraging consumption even further.
But the host of CNBC’s Mad Money, Jim Cramer, thinks that inflation can be beneficial, or at least less damaging, to certain names. Today, I debate why he has included Amazon stock (AMZN) - Get Amazon.com, Inc. Report in this group of winners in an inflationary environment.
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Jim Cramer seems to think that picking stocks of companies with pricing power might be one effective way to fight inflation fears. The reasoning is simple: if a company’s products and services have enough demand and low levels of price elasticity – that is, a change in price does not cause much of a change in quantity sold – they can pass on higher costs to consumers without getting hurt on the top line.
This is not the first time that Jim makes this same argument. In August, he offered the following quote, which summarizes his position well:
“The companies that can raise price without infuriating you? Go buy their stocks. [Don’t fall into the trap of] thinking that the whole market will get wrecked by persistent inflation.”
For the record, Amazon is not the only company that Jim Cramer believes fall within this category of inflation winners. According to him, 27 other stocks are worth considering. Among them are many oil and gas players, like Chevron (CVX) - Get Chevron Corporation Report; investment banks, like Goldman Sachs (GS) - Get Goldman Sachs Group, Inc. (GS) Report; and tech giants, like Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report.
(Read more from the Amazon Maven: Amazon Stock: What Investors Should Know Ahead Of Q3 Earnings)
Could Amazon be a winner?
At first glance, it is reasonable to think that Amazon could hurt from rising prices. Not only inflation, but also disrupted supply chains have been a problem during this period of recovery from the pandemic – which has contributed to pricing pressures. Amazon is in the business of distributing large quantities of products to consumers at competitive prices, and its e-commerce arm could certainly be impacted.
But there are three counterarguments to be made. First, Amazon has become a staple in US households. We explained, a few days ago, how consumers have been willing to sign up for Amazon’s Prime service to benefit from faster shipping and access to other services despite rising subscription prices in the past. This, to me, is a telltale sign of consumer loyalty that points at pricing power.
Also, Amazon might be one of the best equipped retailers to fight off logistics challenges and manage product costs. The company has an extensive distribution infrastructure. It also has the scale to negotiate better prices or even beef up its own private brands, thus having more flexibility on pricing and product offerings.
Lastly, and unbeknownst to some, the bulk of Amazon’s operating profits comes from its cloud division, and not from the e-commerce business. On that end, the Seattle-based company is unlikely to suffer much consumer pricing pressures, if at all.
Amazon’s Web Services has been performing well, including during the transition period to a post-COVID era – see Q2 earnings results. I have no reasons to believe that things will change here, regardless of what happens to inflation.
Do you think that Amazon would be a winner or a loser in a scenario of higher consumer prices?
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)