Peloton Interactive or Starbucks: which stock should you buy?

11th February 2022 09:03

by Rodney Hobson from interactive investor

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Starbucks is the world's biggest coffee chain and Peloton was, until recently, a global fitness star. Things have changed for the latter, so our overseas investing expert gives his view on these two household names.

Amazing what we missed most during the pandemic lockdowns. For some it was the chance to buy overpriced coffee at Starbucks (NASDAQ:SBUX) outlets.

Revenue jumped 19% year-on-year in the three months to 3 January, the chain’s first quarter, to just over $8 billion, and like-for-like sales improved 13%. The average customer spent 3% more than a year earlier. Net income soared by 29% to $815.9 million despite the pressure on costs caused by rising wages and the inflationary price of supplies.

This is the second consecutive quarter of impressive growth figures from Starbucks, which has bounced back from the enforced shutdowns around the world during the worst of the pandemic.

The bonanza at the world’s largest coffee house chain should continue, with 484 extra stores opened in the first quarter, taking the total to nearly 34,000. So, too, will rising costs despite an easing of supply chain blockages.

Workers at a cafe in Buffalo, New York, were in December the first to vote for trade union membership, and two other outlets are set to hold similar votes. Wages and staff benefits have been supressed by a lack of coordinated bargaining power among the workforce and have so far been enhanced only by a United States-wide scramble to attract staff with even the lowest level of skills. This pressure is important, as more than 15,000 outlets are in the US, but since Starbucks already pays its baristas well above the minimum wage the staff may not feel too disgruntled.

A promise made at the end of last October to return $20 billion to investors through dividends and share buybacks over the next three years looks highly achievable. Investors have not, however, been impressed and, good as the last two quarters’ figures are, analysts hoped for more.

Since the shares peaked at $128 last July they have been on the slide and they tumbled alarmingly in January. They look to have bottomed out at around $95, still well up on my original buy tip at $71 nearly a year ago. The yield is just under 2%, not a great figure but a satisfactory one for a company whole business has such momentum.

Starbucks will be a major beneficiary of the end of Covid restrictions. It depends heavily on customers travelling to work or being out shopping.

Source: interactive investor. Past performance is not a guide to future performance.

Perhaps those Starbucks outlets will soon be full of coffee drinkers who have abandoned their Peloton Interactive (NASDAQ:PTON) exercise bicycles and treadmills. Peloton’s management is going through a shake-up after a $439.4 million loss in the three months to 31 December, the second quarter in the fitness equipment maker’s financial year, despite a 6.6% increase in revenue.

Co-founder John Foley is being replaced as chief executive and he and president William Lynch will take non-executive roles. The pain will also be felt somewhat more keenly by 2,800 workers who will lose their jobs.

However, worries over whether Peloton can maintain strong growth in subscriber numbers have been overridden by a report that Amazon (NASDAQ:AMZN) and Nike (NYSE:NKE) are both considering making a takeover approach. Apple (NASDAQ:AAPL) has also been suggested as a possible suitor.

That has halted a massive slide in the Peloton share price from $162 in December 2020 to $24.60. They have now perked up to $37.

Source: interactive investor. Past performance is not a guide to future performance.

Hobson’s choice: I reduced my stance on Starbucks to hold after the shares had slipped back to around $115, but below $100 they merit a buy again. I warned investors off Peloton at around $25 a month ago but the bid rumours have muddied the waters. With three potential, though as yet unconfirmed bidders, the odds favour holding on if you are already in but otherwise the shares should be avoided.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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