Pandemic reopenings last year sent consumers to brick-and-mortar stores in droves. The e-commerce market took a hit that was then compounded when macroeconomic headwinds in 2022 led to a further reduction in online spending. As a result, market leaders like Amazon (AMZN 1.49%) and PayPal (PYPL 1.41%) experienced stock declines of 50% and 62% last year.
However, inflation has eased for nine consecutive months, with the Consumer Price Index rising 4.9% in April after hitting a high of 9.1% in June 2022. The improvement has already allowed several consumer-reliant companies to begin recovering, with Amazon and PayPal well positioned to see their stocks surge over the next year.
As a result, now is an excellent time to consider investing in these companies before it's too late. However, if you only have room for one in your portfolio, you'll need to know which is the better buy. So, let's assess whether Amazon or PayPal is the best investment option.
Amazon
Last year, Amazon's stock tumble came alongside operating losses totaling $10.6 billion in its e-commerce segments in fiscal 2022. Macro challenges led investors to question the profitability potential of its online retail business. However, keeping a long-term mindset with Amazon is crucial, as it is leading in two markets that have promising outlooks over the next decade.
The e-commerce industry is projected to hit $4 trillion this year and continue expanding to $6 trillion by 2027. The market hit a snag over the last year, but as the novelty of shopping offline wears off, consumers could increasingly look to e-commerce for convenience.
In fact, online purchases only made up about 15% of all retail sales last year, suggesting the sector has plenty of room for growth ahead. Meanwhile, Amazon's shares might surge as its dominance in e-commerce pays off.
The first quarter of 2023 has shown signs that the company is headed in the right direction. Amazon's North American segment returned to profitability in Q1 2023, hitting $898 million in operating income after reporting $1.5 billion in operating losses in the year-ago period. The company's international segment also reported marginal improvements.
In addition to its e-commerce business, Amazon's cloud platform, Amazon Web Services (AWS), has vast potential as inflation eases. Companies pulled back on cloud spending over the last year amid rising interest rates. However, that will likely change as managers are increasingly able to spend more freely.
PayPal
PayPal has become an unpopular stock in recent years after parting ways with eBay in 2018, being hit by macro challenges in 2022, and against rising competition. New online payment companies threaten PayPal's market share, while tech giants like Apple and Alphabet have opted for home-grown payment systems. However, despite changes in the industry and skepticism from investors, PayPal's financial growth has remained consistent.
Since 2020, the fintech company's annual revenue rose 55%, while operating income climbed 45%. More recently, Q1 2023 reported an 8% rise in revenue, hitting $7 billion and beating analysts' expectations by $50 million. The quarter also saw earnings per share (EPS) rise 61%, mainly thanks to cost-cutting moves. The company's stock lost a bit of steam with its Q2 2023 guidance, but EPS is still projected to grow by about 25% this quarter.
PayPal has had a rocky few years, but it continues to boast a leading market share in online payment platforms and has lucrative ties with Amazon and Walmart, the biggest U.S. e-commerce retailers. As a result, the company has solid potential to continue seeing financial growth over the long term.
Is Amazon or PayPal a better buy?
Amazon and PayPal were hit hard last year. However, their ability to make quick and effective budget cuts showed their resilience, making both companies' stocks attractive options. The decision on which is the better buy largely lies in which is the safer option.
The clear choice here is Amazon. While PayPal has much to gain from e-commerce growth and its dominance in the sector, Amazon's diversified business makes it the more secure company. In 2022, Amazon remained profitable amid e-commerce declines thanks to its cloud business, highlighting the strength of its revenue streams. Meanwhile, its solid position in the cloud market also means it has much to gain from the current artificial intelligence boom as AWS develops.
Amazon's potential is evident by its average 12-month price target of $137, which is 20% higher than its current position. As a result, Amazon's stock is the better, more reliable buy right now.
