Amazon (AMZN -0.16%) and Peloton Interactive (PTON -0.22%) are two of the hottest stocks on Wall Street. Both of them were hot even before the pandemic, but while COVID-19 has harmed many businesses, it's been a boon to both of these companies.
Amazon is the standard favorite, and Peloton is the new stock on the block. Let's take a look at what they have going for them and which one is better for your stock portfolio.
Many investors look for high-growth companies to fuel their portfolios. High growth comes with risk, but it also provides the opportunity for high gains. Shareholders who believed in Amazon from the time it was a humble online bookseller have seen their stock skyrocket. Those who are sticking with Peloton are looking for the same kind of returns.
Amazon became the go-to retail experience during the pandemic as Americans stayed home and accelerated their adoption of online shopping. The e-commerce giant hired hundreds of thousands of new employees to fill soaring demand, and even had to temporarily pause deliveries of nonessentials to focus on getting customers the goods they really needed.
Sales surged commensurately, increasing 40% in the second quarter ended June 30 and 37% in the third quarter ended Sept. 30.
Peloton has seen even more extreme growth during the pandemic. In the fourth quarter ended June 30, revenue increased 172%, connected fitness subscribers grew 113%, and paid digital subscriptions were up 210%. Clearly, these are the beginning stages of a very popular brand. Some gyms were closed during this time and others continue to stay shuttered, and fitness enthusiasts had to find other means to achieve their fitness goals. This definitely helped increase adoption of Peloton's products, since growth was beginning to slow down before COVID-19.
Keeping it up
Amazon still has tremendous prospects. It's expecting sales to increase between 28% and 38% in the fourth quarter, which includes the high-volume holiday season. It's expanded its business with Amazon Web Services, which provides cloud computing solutions and has picked up many large clients such as Global Payments and Moderna.
It has also made headway in its efforts to get into storefronts, an important piece of omnichannel shopping that's become the new wave in digital. It pioneered the Amazon Go cashierless technology and has opened 26 Go stores in four states. It also launched four Fresh stores in California, with another on the way in Illinois. These combine in-store grocery shopping with almost every iteration of digital options, including the Amazon Dash cart, where customers can place their goods and skip the checkout lane.
Peloton also has a lot of future potential. It recently lowered the price of its standard bike and introduced a newer, premium model. It's also launching a line of connected fitness treadmills with a range of prices. Its exercise class subscription model ensures there's an inexpensive way to connect with the company and keeps the brand in the public eye.
One could argue that once the pandemic ends, the kind of growth Peloton is seeing will subside. While that's probably true to some degree, Peloton customers are happy customers, and getting them to take the first step is the beginning of keeping them on board. The company has high retention rates, at least in part because customers who buy the expensive equipment want to make the most of their purchase.
Amazon stock is up 71% year to date and is trading at about 90 times trailing 12-month earnings. That seems high, but historically Amazon has traded for a much higher valuation.
Peloton stock is up 300% year to date and is trading at a staggering 408 times trailing 12-month earnings.
I think that they're both great companies, and investors won't lose out buying shares in either one. But if I had to choose one, I'd go with Amazon. It's more established and therefore less risky. It's also trading pretty cheaply, and has many years of growth ahead, making this an excellent time to buy shares.