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Better Buy: Disney vs. Peloton

By James Brumley - May 20, 2021 at 7:45AM

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There's a right time to add more speculative picks. This isn't it.

They may be in different businesses, but in at least one regard, Walt Disney (DIS 7.29%) and Peloton Interactive (PTON 10.99%) are a lot alike at the moment. The entertainment giant's stock is falling after it reported slowing growth of its flagship streaming product, Disney+, while shares of the fitness equipment maker are down in response to a major product recall that dented the company's reputation. Of course, both stocks were already peeling back from peaks hit earlier this year following stellar run-ups in 2020.

Smart investors know these dips are buying opportunities, even if taking such a plunge feels uncomfortable. Both brand names are among the most respected in their respective industries, and will surely survive their current headwinds. If you're interested in buying into either, you're not crazy.

If you've only got room for one consumer discretionary name right now, however, it's got to be Disney.

a runner works out on a Peloton Tread treadmill.

Image source: Peloton.

Why not Peloton

Don't misread the message. If you've stuck with your Peloton position through its 44% pullback from January's high, you've already done the hard part. It remains the riskier asset, but from here it also offers more reward potential than Disney.

Sure, the pandemic may be ending, but demand for premium at-home exercise equipment is persisting. Even nearly a full year into the COVID-19 pandemic, Peloton drove revenue growth of 141% during the quarter ending in March. Subscription revenue soared, too, with subscriptions to its basic virtual instructor-led workouts booming more than 400%. Connected fitness subscriptions -- a higher level of fitness instruction -- were up 135% year over year to reach 2.08 million, up from the previous quarter's figure of 1.67 million. Better yet, last quarter's connected fitness subscription retention rate was an impressive 92%, indicating customers like the company's approach to getting them to get in shape.

Still, if you've got fresh cash to work with and have narrowed your prospective pick list to just a few names including Walt Disney and Peloton, Peloton's a tough name to plug into just yet.

Its chief liability is the obvious one: the recall. Two of its treadmills (Tread and Tread+) were determined to be of an unsafe design following several user injuries and even one infant's death. CEO John Foley says the impact on sales will be minimal, shaving an estimated $165 million off of the current quarter's top line that would have otherwise come in around $1.1 billion. It remains to be seen, however, if Peloton can actually shrug off the recall's reputational impact -- its second just since October -- when alternatives are readily available. Similar fitness hardware from names like Tonal, Echelon, Tempo, and even a familiar NordicTrack is now able to bring similar instructor-led workout sessions directly to consumers in their homes.

Uncertainties never help boost a stock's value.

an artist illustration shows Disney licensed Cinderella's castle at sunset

Image source: Walt Disney.

Why Walt Disney

Disney's certainly got its own challenges. Just months after evolving into a streaming-first company, its Disney+ streaming service only picked up 8.7 million subscribers for the quarter ending in March. It's still got an impressive 103.6 million customers on board, although considering this was the service's slowest quarterly growth since launching in November 2019, its internal goal of 230 million to 260 million Disney+ subscribers by 2024 is now in question. In the meantime the movie theater industry's future is uncertain, and while theme parks are finally reopening, many consumers remain cautious of gathering in crowds.

However, these headwinds will fade in time as the pandemic shrinks in the rearview mirror.

Consumer research and consulting company McKinsey gathered the data, concluding in March that while things like online grocery shopping and telehealth visits are here to stay, in-person entertainment and leisure-driven air travel will indeed bounce back. These activities may never reclaim pre-pandemic levels, for the record, and it will take until 2024 until they reach their full recovery potential. But consumers are going to put this latest economic downturn behind them, just as they did with prior global events like the subprime mortgage meltdown, 2003's SARS virus outbreak, the Great Depression, the 9/11 attacks, Japan's so-called "lost decade," the Spanish Flu pandemic of 1918, Chernobyl, and dozens of other calamities that seemed insurmountable at the time. Capitalists and consumers eventually find a way to reconnect.

And despite all of its challenges, analysts still see Disney as a stalwart in a tough environment. Last fiscal year's revenue setback of 6% is expected to more than be offset by this year's projected top-line growth of 26%, en route to a 2025 top line of $109 billion. Earnings are expected to experience even stronger growth as the world eases back into post-pandemic normalcy.

Walt Disney's top and bottom lines should soar once the pandemic is made history.

Data source: Thomson Reuters. Chart by author.

More important than the outlook, Walt Disney is a well-established brand name in a league of its own. Its sole focus is on drawing a crowd of paying customers with products that are perpetually marketable just because they're fun, and it's proven capable of doing that in any environment. The same can't quite be said of Peloton, at least not yet.

Bottom line? Given the unusual backdrop, stick with the less speculative name here.

James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Peloton Interactive and Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$120.62 (7.29%) $8.19
Peloton Interactive, Inc. Stock Quote
Peloton Interactive, Inc.
PTON
$13.23 (10.99%) $1.31

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