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Better Buy: Amazon vs. Keurig Dr Pepper

By Parkev Tatevosian – Jun 10, 2020 at 6:00AM

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Which one of these consumer goods favorites will make a better long-term investment?

As cities, states, and countries continue reopening their economies, shoppers are coming out in a mixed fashion. Some are excited to have the opportunity to leave their homes, while others are hesitant and taking a more cautious approach. For (AMZN -1.57%) and Keurig Dr Pepper (KDP -0.83%), the shift out of stay-at-home orders may not be all positive.

As people stayed at home more often, shopping increased at Amazon, and it is not certain how behavior will change now that brick-and-mortar stores are reopening. Keurig Dr Pepper was benefiting from people stocking up on its products, but losing sales from people not being able to dine in at restaurants. To be sure, the short-term effects of COVID-19 will be substantial. However, when deciding which company to invest in, you should consider the long-term prospects of the stocks.

Woman with hands up looking thoughtful

Image source: Getty Images.

The adjustments Amazon is making because of the pandemic are substantial. In the company's most recent quarterly earnings release, CEO Jeff Bezos said: "Amazon expects to spend the entirety of the expected $4 billion of the expected operating profit in the next quarter on COVID-related expenses." 

Simultaneously, the company is experiencing greater demand for its products and services. Revenue in the quarter was up 21%, and in-home entertainment's soaring popularity raised consumption of Prime Video by 35% in March. Additionally, online shopping for groceries is experiencing an unprecedented surge. All of this bodes well for investors because some of the new shoppers will convert into long-term customers. 

Amazon has a loyal base of 150 million Prime members worldwide. In addition to paying a fee for membership, these customers place almost twice as many orders as non-Prime members. The shopping activity attracts third-party sellers to bring more items to its marketplace, increasing competition with other sellers and lowering prices. Of course, a greater assortment of items and lower prices attract more consumers and create a positive feedback loop that continuously improves value for buyers and sellers alike.  

Two pairs of hands wrapped around mugs of coffee

Keurig Dr Pepper sales increase as people stock up. Image source: Getty Images.

Keurig Dr Pepper

Keurig Dr Pepper's net sales grew 4.4% in its most recent quarter. The company's brands -- which include Dr. Pepper, Canada Dry, Snapple, Evian, Motts, Green Mountain, and The Original Donut Shop -- benefited as consumers stocked up as a result of stay-at-home orders. What's more, that strength looks like it will continue. At a time when many peers won't even offer guidance on the next quarter, Keurig is guiding for impressive results the rest of this year: net sales growth of 3% to 4% and earnings growth of 13% to 15%.

Keurig's coffee systems segment manufactures over 75% of the coffee pods in the U.S. Consumption of the company's K-Cups was up 5.6% in the quarter, despite the substantial slowdown late in the quarter caused by COVID-19. Additionally, hot drinks provide a nice balance for the company. They sell better in colder weather, which offsets declines in sales of cold beverages that do better in warmer weather. 

However, even as the near-term outlook is positive, risks remain ever-present. Most important, consumer behavior is shifting away from sugary drinks, which will hurt many of Keurig's brands. In an interview, PepsiCo CFO Hugh Johnston said: "[A]t some point, consumers are all going to shift to a low-sugar or no-sugar product." 

As a countermeasure, Keurig Dr Pepper and the industry shifted to smaller serving sizes, introducing smaller bottles and smaller cans to the market. Still, decreasing consumption of some of its more sugary beverages is likely to continue. 

The final verdict

Both Amazon and Keurig Dr Pepper are impressive companies that will likely increase your wealth if you invest in them for the long term. But if you have to pick only one, it should be Amazon. The two consumer goods stocks are each exposed to a unique long-term trend in consumer behavior. Keurig Dr Pepper will likely experience trouble in packaged beverages as people reduce consumption of sugary drinks. But Amazon will benefit from the continuing shift to shopping online.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned, Inc. Stock Quote, Inc.
$113.00 (-1.57%) $-1.80
Keurig Green Mountain, Inc. Stock Quote
Keurig Green Mountain, Inc.
$35.82 (-0.83%) $0.30

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