When inflation rises too high too fast, it can be bad news for the broader economy. In June 2022, prices of everyday goods and services rose at the fastest pace in 40 years with the annualized Consumer Price Index (CPI) hitting 9.1%.
It prompted a swift response from the U.S. Federal Reserve, which embarked on the most aggressive campaign to hike interest rates in its history. This has been a painful process, but allowing inflation to continue climbing would be much worse as it tends to affect low-to-middle income consumers the most, because they spend a larger proportion of their money on essential goods and services than high income earners.
Here's the good news: The Federal Reserve's efforts are working. Annualized CPI has declined in every single month since its peak last June. Now, 12 months later, it's at just 3% and is rapidly closing in on the Fed's 2% target, which means an end to the rise in interest rates might be around the corner.
A number of companies have been impacted by the inflationary environment, especially those directly exposed to consumer spending as it squeezed household budgets. So with the rise in inflation reversing, it makes sense for investors to own shares in some of those hard-hit companies. Below, I'll share two great candidates.
1. Amazon
Amazon (AMZN 3.43%) is the world's largest e-commerce company. It's an incredibly diverse organization today with segments spanning streaming, cloud computing, and digital advertising although online sales have still accounted for over 41% of its $524 billion of total revenue in the last four quarters.
Here's the problem: Online sales have generated no growth compared to the prior four quarters, and when Amazon's single largest revenue generator isn't growing, it's a drag on the entire company. In the first quarter of 2023, for example, Amazon's overall revenue grew by just 9% year over year despite strong results from its cloud segment (up 16%) and its advertising segment (up 21%).
Therefore, getting the e-commerce engine running again is key to Amazon's financial success, and that's likely to happen with an improvement in the broader economic environment. In fact, some positive signs have just emerged. Amazon's annual discount sales event, Prime Day, ran on July 11 and 12, and the company announced it had generated $12.7 billion in sales over the 48-hour period. That was a record high, and it represented 6.1% growth compared to the 2022 Prime event. Shoppers purchased a whopping 375 million items, up from 300 million last year.
It wasn't all good news, though, because analysts had predicted $13.1 billion in sales. But overall, Amazon's Prime Day result was a step in the right direction given its retail struggles over the past year.
Despite a powerful 55% gain in 2023, investors can still buy Amazon stock at a 27% discount to its all-time high. Given the rapid decline in inflation, it's probable that consumers will feel some relief over the coming six to 12 months, so now might be a great time to pick up a share or two of this retail giant.
2. Peloton Interactive
The second stock that will likely benefit from a continued decline in interest rates, and a reinvigorated consumer, is Peloton Interactive (PTON 4.29%). Let me be clear: This is a far riskier pick than Amazon -- in fact, Peloton was in a fight for survival last year before its new CEO, Barry McCarthy, aggressively slashed costs and stabilized the company's finances.
The company makes at-home exercise equipment, which was a hit during the pandemic, but it's having trouble adjusting to a world where COVID-19 restrictions are no longer a factor. Peloton's best year was in fiscal 2021 (ended June 30 of that year), when it generated $4 billion in revenue. That number fell to $3.5 billion in 2022, and it's on track to come in around $2.8 billion in fiscal 2023 -- those official results will be released in August.
Beyond the pandemic-related headwinds I mentioned, there's no doubt the strain on household finances is also hurting this company. This isn't a great time to be selling an exercise bike with a starting price tag of over $1,400 or a rowing machine worth over $3,000. But to Peloton's credit, it's finding new ways to get that hardware into the consumers' home without the upfront cost. It now offers subscription-based plans that allow customers to pay the product off over time, and it's also selling refurbished equipment at a lower price point.
Additionally, Peloton is leaning further into content creation (virtual classes) and its digital presence. The company currently has 853,000 subscribers to its mobile applications who don't own any Peloton equipment at all, because they prefer exercise regimens like running, yoga, or meditation, and it wants to grow that number because it has a high gross profit margin.
In May, it announced three new subscriptions, including one free tier and two paid tiers, with varying benefits. The most expensive is priced at $24 per month and gives the user access to Peloton's entire digital ecosystem, and it even comes with a cadence tracker that can sync with non-Peloton hardware. This should help grow the company's addressable market.
Those new initiatives, combined with an improving economic climate that should reignite hardware sales, could place Peloton back on a growth trajectory within the next couple of years. And given that McCarthy has slashed more than half the company's workforce and offshored manufacturing, he has managed to bring free-cash-flow losses down to a minimum and has successfully stabilized the company's cash balance.
That means the risk of Peloton succumbing to its challenges might be off the table (for now), and since its stock is still down 94% from its all-time high, the risk-reward proposition looks enticing enough for investors to buy in ahead of more favorable economic times ahead.
