Nike (NKE +1.97%) and Peloton (PTON +2.15%) represent two different ways to invest in the fitness market. Nike is the world's largest producer of athletic footwear and apparel. Peloton dominates a high-growth niche with its pricey exercise bikes, which are tethered to subscription-based spin classes on integrated touch screens.
The pandemic generated tough headwinds for Nike with supply chain disruptions and store closures, but stirred up tailwinds for Peloton, which benefited from stay-at-home measures and gym closures.
Image source: Getty Images.
Nike's stock still rallied 40% in 2020 as investors looked past its near-term challenges and toward its long-term recovery. Peloton's stock skyrocketed more than 430% as it dazzled investors with its pandemic-induced growth.
But as the pandemic passes, Nike should face easier year-over-year comparisons as Peloton faces tougher ones. So will Nike outperform Peloton this year, or will Peloton maintain its momentum after the crisis ends?
How badly did the pandemic hurt Nike?
Nike's revenue fell 4% (2% in constant currency terms) in fiscal 2020, which ended last May. Its EPS declined 36%, mainly due to higher fulfillment costs, higher tariffs, and promotions amid the pandemic.
The pandemic mainly throttled Nike's growth in its fourth quarter. Its digital sales surged 79% year-over-year in constant currency terms during the quarter, but that shift couldn't offset its loss of in-store revenue -- which caused its total revenue to drop 38%.
However, Nike reopened most of its stores in the first quarter of 2021. As a result, its reported revenue dipped just 1% year-over-year in the first quarter and rose 9% in the second quarter -- which boosted its revenue 4% in the first half of the year. Its EPS also grew 11% in the first half as lower operating expenses offset a one percentage point drop in its gross margin.
Nike expects its growth to accelerate in the second half of the year, and for its revenue to rise by the "low teens". Analysts are even more optimistic, and expect its revenue and earnings to grow 16% and 88%, respectively, for the full year.
Next year, they expect its revenue and earnings to grow 11% and 28%, respectively, which suggests its business will stabilize and support the ongoing expansion of its direct-to-consumer channel with new stores and e-commerce features. Based on those forecasts, Nike's stock trades at just over 50 times forward earnings -- which suggests a lot of growth is already baked into the stock.
Image source: Peloton.
How much did the pandemic help Peloton?
Peloton's revenue roughly doubled to $1.83 billion in fiscal 2020, which ended last June. Its number of subscribers surged 113% to 1.09 million, and it narrowed its net loss from $196 million to $72 million. It also generated an adjusted EBITDA of $118 million, compared to a loss of $71 million in 2019.
In the first quarter of 2021, Peloton's revenue rose 232% year-over-year to $758 million as its subscriptions jumped 137% to 1.33 million. It posted a profit of $69 million, compared to a loss of $50 million a year earlier. It also generated an adjusted EBITDA of $119 million, versus a loss of $21 million a year earlier.
Peloton expects its revenue to rise at least 113% for the full year, its subscriber base to roughly double, and its adjusted EBITDA to soar over 155%. Analysts expect its revenue to rise 116% this year with a full-year profit.
Peloton's numbers are impressive, but its growth will likely decelerate next year after the pandemic passes and gyms reopen. Competition from other stay-at-home streaming workout solutions, such as Lululemon's Mirror and Apple's Fitness+, could also pull away potential subscribers.
As a result, analysts expect Peloton's revenue to rise just 34% next year, but for its earnings to double. Peloton's stock initially looks pricey at 345 times forward earnings, but that multiple could contract quickly as its profitability improves. In terms of sales, it trades at just eight times next year's sales -- which is significantly cheaper than many other high-growth tech stocks.
The winner: Nike
I still like Peloton as a speculative investment, but I'm too concerned about its post-pandemic growth to consider it a stable long-term play. Nike's stock isn't cheap, but it will arguably generate more stable growth in a post-pandemic world. Therefore, I believe most investors should stick with Nike instead of taking a leap of faith with Peloton -- which will inevitably face tougher comparisons and competition this year.
