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Better Buy: Peloton vs. Nike

By Neil Patel - Mar 1, 2021 at 11:08AM

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These fitness-focused companies each have their own merits, but which should investors own?

There's no doubt that the pandemic is having significant impacts on the business world. In the case of Peloton Interactive (PTON -0.55%), the scorching $36 billion at-home fitness company benefited greatly from coronavirus-related lockdown orders as people needed ways to work out without leaving the house. The stock price is up almost fivefold over the past year, but the easing of restrictions and the progress of vaccinations could slow down its impressive growth. 

Meanwhile, Nike (NKE -1.00%), the $172 billion sports apparel and footwear behemoth was forced to temporarily shutter many of its stores in the fiscal 2020 fourth quarter (which ended May 31, 2020) due to the lockdowns. Two quarters later, its business has finally returned to growth, helping propel the stock price 35% higher over the past 12 months.

It might be time for investors to start positioning their portfolios for a post-pandemic world. Depending on your view, either Nike or Peloton could make the cut. Let's dive in and see which is the better buy at the moment. 

keyboard key that says buy stock

Image source: Getty Images.

The hot growth story 

Peloton was registering fantastic growth even before 2020, but the pandemic supercharged its business. Revenue in each of the last three quarters soared more than 100% versus the prior-year periods, and the company now has 1.67 million connected fitness subscribers (those who purchased equipment and pay the $39 monthly subscription fee for fitness services). Engagement is also high, as the average monthly workouts for these members increased from 12.6 in the second quarter of 2020 to 21.1 in the corresponding Q2 in 2021, which ended Dec. 31, 2020, for Peloton. 

Demand for Peloton's products clearly remains elevated, but there are two looming headwinds. 

First, the unanticipated surge in consumer interest has created supply chain issues. Delivery times for the popular Bike and Bike+ can be up to 10 weeks, potentially turning off customers who don't want to wait that long. The company hopes to fix this with its acquisition of exercise-machine maker Precor as well as a $100 million investment to expand shipping capabilities. 

The second threat for Peloton is the continued reopening of the economy as vaccines roll out. Fitness center chains such as Planet Fitness have highlighted net member growth to start 2021, which demonstrates the public's comfort with venturing out again to brick-and-mortar gyms. 

Peloton's enthusiastic following and significant momentum could certainly help to allay these concerns, but with the stock trading at 13 times sales, it appears too expensive given the near-term worries. 

The leader in sports apparel 

While the coronavirus pandemic struck a blow to Nike's retail business, the company wasn't down for long. In the most recent quarter (the second quarter of fiscal 2021, ending Nov. 30), overall sales increased 9% over the prior-year period, led by 24% growth in its Greater China segment. 

It's been frequently noted that the health crisis accelerated the existing consumer shift to e-commerce, and this is apparent when looking at Nike's recent performance. Digital revenue skyrocketed 84% in the most recent quarter, with North America registering triple-digit percentage gains. But this should come as no surprise to longtime followers of the company. 

Just last summer, Nike announced its Consumer Direct Acceleration initiative (expanding off the Consumer Direct Offense from 2017) to continue driving the use of technology to improve product development and innovation. 

The Nike mobile app grew membership by 200% in the most recent quarter, and the popular SNKRS app, which just debuted its first-ever live product drop, remains a key competitive advantage. Nike is set to flourish as it continues driving higher engagement with consumers even as we get past the pandemic. 

Investors will also be pleased to know that the company has increased its dividend 19 years in a row. The stock currently trades at a forward P/E of 46, which is warranted given management's long-term goal of mid-teens growth in earnings per share. 

The winner 

The pandemic affected Peloton and Nike in different ways. The former experienced a meaningful boost to its business, while the latter took a hit before returning to growth.

Peloton, which was already an expensive stock, faces some potentially serious issues, the most important being the reopening of the economy. Nike, on the other hand, sells for a much more reasonable valuation and is positioned to continue its success in a post-pandemic world as it finds more ways to connect with customers. Therefore, Nike is a better buy right now. 

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Stocks Mentioned

Peloton Interactive, Inc. Stock Quote
Peloton Interactive, Inc.
$9.13 (-0.55%) $0.05
NIKE, Inc. Stock Quote
NIKE, Inc.
$101.18 (-1.00%) $-1.02

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