The benchmark S&P 500 hit a record high in December 2023, cementing the bull market that technically began when the index bottomed in October 2022. It continues to march higher in 2024 on the back of strong corporate earnings and the potential for interest rate cuts later this year.
Bull markets are a rewarding time to be invested in the market, but it's still important to be selective about the stocks you buy. With that in mind, here's why Axcelis Technologies (NASDAQ: ACLS) is a buy now, and why investors might want to leave Peloton Interactive(NASDAQ: PTON) behind.
The stock to buy: Axcelis Technologies
Semiconductor stocks are hot right now because chips are the beating heart of the artificial intelligence (AI) revolution. But Axcelis doesn't make any chips itself; rather, it's an important service provider that manufactures ion implantation equipment that's key to the fabrication process.
In fact, GPUs, CPUs, DRAM (memory), and NAND (storage) chips can't be manufactured without the advanced process technologies and equipment Axcelis provides. CEO Russell Lowe says chipmakers will have to increase their production capacity to meet demand for AI, which will translate into more sales for Axcelis.
Plus, Lowe is preparing Axcelis for the fast-approaching moment when AI shifts from the data center and enters every device, smartphone, and personal computer. Micron Technology, for example, says AI-enabled computers require up to 80% more DRAM capacity than traditional computers, and AI-enabled smartphones require as much as double the capacity of their predecessors. That is a tailwind for every chip company -- and every service provider like Axcelis.
Axcelis expects to generate around $1.1 billion in revenue this year, which would be roughly equal to its 2023 result, but it already issued a forecast for 2025 that suggests revenue could grow to $1.3 billion. Plus, the company is working through an order backlog worth $1.1 billion, and technologies like AI could drive that figure much higher in the coming years.
Here's the kicker: Based on Axcelis' trailing 12-month earnings per share of $7.57 and its current stock price, it trades at a price-to-earnings (P/E) ratio of just 14.9. It's substantially cheaper than the rest of the semiconductor sector, represented by the iShares Semiconductor ETF which trades at a P/E ratio of 35.5.
In other words, Axcelis stock will have to more than double just to trade in line with the average valuation of its peers. The fact that this stock has soared by more than 660% over the past five years, and is still cheap, really speaks to the company's incredible progress. It shouldn't have trouble heading higher from here, especially under bull market conditions.
The stock to sell: Peloton Interactive
Peloton Interactive was one of the hottest stocks in 2020, driven higher by surging demand for its at-home exercise equipment during the worst period of the pandemic. But its shares currently trade around $3, which is 98% below their all-time high set less than three years ago. Simply put, demand for its products fell off a cliff once lockdowns ended and social conditions returned to normal.
Peloton is now in a fight for survival. The company appointed Barry McCarthy as CEO in 2022, hoping his extensive executive experience would help right the ship. Despite making several positive changes, Peloton continues to grapple with a shrinking business and a dwindling cash balance.
The company's revenue peaked at $4 billion during fiscal 2021 (ended June 30, 2021), and declined every year since. Fiscal 2024 (ending June 30) won't be any different; the company expects revenue to come in at $2.7 billion, which would be down 4% year over year.
McCarthy cut costs dramatically when he joined Peloton, laying off half of the company's workforce, offshoring its manufacturing, and optimizing operating expenses like marketing. Unfortunately, shrinking the business makes it really hard to grow revenue, but those decisions were completely necessary to prevent Peloton from running out of money.
The company lost $521.4 million on the bottom line through the first nine months of fiscal 2024 (ended March 31), which follows a net loss of $1.2 billion in fiscal 2023. Considering it only has $794.5 million in cash remaining on its balance sheet -- with long-term debt worth nearly $700 million -- you can see why management has little choice but to slash costs.
Peloton's business is in a negative spiral, and to make matters worse, McCarthy just stepped down, leaving the company without a permanent CEO. If Peloton can't find a way to grow revenue or turn a profit, not even the strongest bull market will resurrect its stock price. That's why investors might want to avoid this name.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Peloton Interactive and iShares Trust-iShares Semiconductor ETF. The Motley Fool has a disclosure policy.
