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Top 10 Companies That Offer Restricted Stock Units

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Restricted Stock Unit

Restricted stock units (RSUs) are a top perk for employees. Many tech companies that are growth stocks offer this stock-based compensation once an employee joins a company. In many cases, they are an alternative to stock options similar to ETFs.

In this TradingSim article, I will explain what a restricted stock unit is. Throughout this article, I will also explain which stocks can be added to rebalance portfolios and help their trading strategies because they are profitable enough to offer employees the best RSUs.

What are restricted stock units?

When a company hires an employee, at first they may receive the units as part of their compensation. RSUs are grants that are part of stock-based compensation that are equal to the value of a corporation’s common stock. When companies issue the grants, they are based on the value of the company’s stock.

How do RSUs work?

Employers distribute restricted stock units to employees after a vesting period. A vested definition means that an employee will own shares. During a vesting period, a certain amount of time an employee has to work at a company before they receive the shares.

For example, a company can give an employee 2,000 RSUs. If 25% of the RSUs vest each year, after one year, 500 shares will vest. In addition, employees can also receive the shares as cash. Once they vest, an employee can receive sell the shares.

If employees want to donate their RSUs to charity, they can help a good cause– and themselves at tax time. One benefit is that employees can get an itemized deduction that’s equal to the stock’s market value. The second benefit is that employees can avoid capital gains taxes by giving RSU shares to charities.

What are double trigger RSUs?

Double trigger RSUs are another kind of restricted stock unit that employers offer. They are offered by new companies before their IPOs(initial public offerings. Double trigger RSUs are not taxed until they are vested and the companies go public with their IPOs.

Garrett Perez, a CPA, notes that many companies have double trigger restrictive RSUs to protect their workers.

“Most companies who do in fact issue RSUs have this requirement [of double-trigger vesting] as it would be extremely punitive on their employees to have them recognize it as income with essentially no market to sell it in. I’ve never seen a pre-IPO company that does not have the double vesting requirement,” said Perez.

What is a restricted stock unit vested schedule?

Some employers offer RSUs on a graduated vesting schedule. In that case, the units may vest 10% after one year, 20% after two years, and so on.

Vested schedules for restricted stock units vary in three ways. For example, say an employee receives 120 RSU’s in January 2020. In cliff vesting, workers receive 100% of their benefits after a certain amount of time. In a three-year vesting schedule, an employee receives all their shares in January 2023.

With a graded vesting schedule, a company gives fewer shares of its stock at an annual rate. If there’s a three-year graded vesting schedule, an employee may receive 30 shares of a stock every January until 2023.

In a cliff/graded vesting hybrid, there is a mixture of the two vesting schedules. A company can issue 40 shares of its stock in January 2020. Then, they may issue 3-4 shares a month until the vesting period is over.

How do RSUs differ from stock options?

Similar to stocks vs. ETFs, RSUs are similar to stock options, but have key differences. In most instances, restricted stock units

  1. don’t expire. They convert into shares after a vesting period. Because of the conversion, they don’t ever have an expiration date.
  2. have the same fair market value during the vesting period.
  3. complete a vesting schedule usually after five years.
  4. are taxed as regular income when they’re vested.

In contrast, stock options

  1. expire 10 years after employees receive them.
  2. tie into the stock price. If a stock price drops below the grant price, the option’s value plummets. When a stock price rises, the stock option’s value jumps as well.
  3. aren’t vested.
  4. are taxed at the time the options are exercised.

What are the advantages of restricted stock units?

In a bear market, restricted stock units can be a safer option for employees. Because stock options are tied to a stock price, a diminished stock price can hurt an employee’s stock options. However, employees take RSUs at a stock’s current market value when they’re vested. At the time the units are vested, they could have a higher value to employees.

What are the disadvantages of RSUs?

Because restricted stock units are different from stock options, they may not reap all the benefits. Since most RSUs vest after five years, many employees may leave their jobs before they enjoy the stock perks. If an employee quits, their former employer forfeits the RSU that remain.

Even if employees stay with a corporation for five years, the value of their RSUs may not be the same after the vesting period. If the stock loses value during an economic downturn, the RSUs may lose value when the employee receives the shares.

How are restricted stock units taxed?

In the year they’re vested, RSUs are taxed as income if an employee keeps the units. If an employee sells the units, capital gains taxes will due at the time of the sale. Restricted stock units aren’t tax-free investment expenses. For example, if an employee vested 20,000 shares of a company’s stock at $20, the value of the RSUs will be $200,000. That amount is treated as taxable income by the IRS.

It’s important to have the RSU vested income set aside to pay taxes because tech companies usually may not pay them themselves. The success of tech companies may ironically mean that they don’t make withdrawals for employees.

Corporations usually withhold state, federal, Social Security, and Medicare taxes on RSU’s. The taxes are usually at a flat rate of 22%.

However, because tech companies are often in high tax brackets, a tech company’s workers often have to pay higher taxes on their RSUs. They would often owe more than what employers would set aside to cover taxes.

Special tax election can collect RSU taxes sooner

If an employee wants to take their taxes out before the restricted stock units vest, they can make a special election. The special Section 83(b) election taxes employees before the RSUs vest. The RSUs are taxed as extra compensation.

If employees keep the restricted stock units for more than a year, the RSUs are taxed at a lower rate as capital gains. However, the units are taxed in the year that employees receive them, even if the stock unit declines in value.

What are the RSU tax withholding methods?

There are four main tax withholding methods for restricted stock units.

  1. In a same-day sale, all of the shares sell on the day they’re vested. The money can be used to pay taxes.
  2. With a cash transfer, money is deposited from an employee’s account to pay taxes.
  3. In the sell-to-cover method, an employee receives shares at the end of the vesting period. An employee’s broker can sell the shares to cover tax expenses. Then, a worker can keep the remaining shares.
  4. With a net share settlement, an employee’s company can retain some of the vested RSUs. The shares are equal to the withholding tax amount. After that, the units that are left can be deposited to a brokerage account.

What is the cost basis for restricted stock units?

Cost Basis

The cost basis for RSUs is the fair market original value of an employee’s shares on the day that the units vest and they receive the shares. That value will likely never change throughout the vesting period of the restricted stock units. The cost basis usually stays the same. It isn’t adjusted to calculate an employee’s tax calculations unless the unit amount is $0.

All of the corporations below offer generous RSUs to employees. These companies are the top corporations that offer restricted stock units to employees.

1. Amazon

Amazon’s stock soars during COVID-19

During the coronavirus pandemic, Amazon’s (NASDAQ:AMZN) stock soared 68% a year after hitting its rock-bottom low. Financial experts like Wedbush analyst Michael Pachter said the e-commerce boom during quarantine will boost Amazon in the long term.

“E-commerce is likely one of the biggest beneficiaries. E-commerce is likely to see a permanent shift away from offline stores,” said Pachter.

FBN Securities analyst Shebly Seyrafi believes that Amazon stock will continue to rise even if another quarantine happens in the U.S.

“To us[FBN Securities], AMZN[Amazon] is the ultimate ‘stay-at-home stock,'” wrote Seyrafi in a note to clients.

Amazon raises wages, but cuts RSUs for hourly workers

Amazon’s RSUs usually vest after four years. They vest on a 5-15-40-40 schedule. That means that after year 1, the restricted stock units vest 5%. Then they vest 15% the second year. In the last two years, they vest at 40%.

During 2018, Amazon eliminated RSUs for its hourly workers. In exchange for raising the wage of hourly workers to $15, Amazon ended RSUs as part of employee benefits. As noted in a company blog post, Amazon restricted stock units will vest this year, and in 2021. The corporation replaced the RSUs with direct stock. An Amazon spokesperson explained the changes.

“The significant increase in hourly cash wages more than compensates for the phase-out of incentive pay and RSUs,” said the spokesperson.

“We can confirm that all hourly Operations and Customer Service employees will see an increase in their total compensation as a result of this announcement. In addition, because it’s no longer incentive-based, the compensation will be more immediate and predictable,” added the spokesperson.

Amazon RSUs help employees buy homes

For salaried employees that still receive RSUs, the units make it easier to buy pricey homes in the company’s home base of Seattle. Diana Bowar, a loan officer at 1st Security Bank, offers restricted unit stock loans to Amazon employees to buy million-dollar homes. Bowar noted that the employees receiving RSUs are more likely to stay in Seattle.

“There’s a need in our backyard. And we’ve seen that people who are getting RSU income and have contracts with Amazon, the likelihood that they’re going to stay in that job making that kind of income is good,” said Bowar.

In 2019, bank lenders usually need employees to show two years of RSU income before they consider restricted stock units as income. Don Zender is branch manager of Evergreen Home Loans and Veterans Lending. He noticed that Amazon employers couldn’t use their RSUs as a down payment on houses.

“But if you start at Amazon, you can’t do that. The biggest hurdle has always been the first couple years,” said Zender.

Many lenders like Evergreen are now open to providing loans to employees with Amazon RSUs.

“Some lenders are starting to say, well, RSUs are not really a one-time thing,” said Steve Geri, a financial adviser at Denny Park Investments in South Lake Union. “They’re a continuing form of compensation in many industries.”

Amazon is a top stock offering restricted stock unit

2. Uber

Uber stock strong as it moves beyond ridesharing

Uber(NASDAQ:UBER) stock recently rose 3% after recent reports it was purchasing food delivery service Postmates. The acquisition would be a welcome addition to Uber’s own food delivery division, Uber Eats. Canaccord Genuity Maria Ripps wrote a note to clients that suggested that Postmates would help Postmates raise Uber’s stock more.

“Postmates should continue to benefit from restaurant selection and strong positions in key markets. However, as the fourth-largest player in the US market, we also see it as a potential consolidation target,” wrote Ripps in the recent client note.

Uber benefits from being rideshare leader

The ridesharing giant has benefitted from being a rideshare leader. Uber CEO Dara Khosrowshahi noted that the company has an advantage over competitor Lyft because of its global reach and diversified businesses under the Uber umbrella.

“We[Uber] are structurally set up more efficiently and more optimally than anyone else to move to profitability. This environment is perfect for us,” said Khosrowshahi.

Uber established restricted stock units in beginning

When Uber first went public in 2019, it detailed in its IPO filing how it would distribute its RSUs.

Uber is a top tech stock that offers RSUs

“As we transition to become a publicly-traded company, we expect that the mix of service- and performance-based components of our equity compensation will shift,” said Uber.

To help us achieve our objectives of rewarding our executive officers for their experience and performance and motivating them to achieve our long-term strategic goals following this offering, we anticipate that performance-based vesting conditions applicable to RSUs granted to our executive officers will become more prevalent,” added Uber.

Uber employees see downside to RSUs

While Uber’s IPO has been successful, there was an unexpected tax burden to its employees. When the IPO launched, Uber recorded its shares at $45. The company tied the restricted stock unit settlement to its IPO launch in 2019. Uber was optimistic that the stock would rise and give a bigger payoff to employees.

In a letter to employees in May 2019, Uber hoped that the move would “mitigate the risk that the company could be responsible for paying a significantly higher amount in taxes if the stock price increases meaningfully after the IPO.

However, the opposite happened. Uber stock dropped to $23. Because the stock fell, employees have to pay extra taxes on capital losses. If the stock had gone up, Uber and its employees would have had to pay less tax in the long run. Employees at the time noted how the extra tax bill shocked them at the time.

“Word started dripping out to say, ‘Hey, I actually owe quite a bit of money to the government. There was a bit of panic and a lot of anxiety’,” said the former employee.

Uber’s RSU is cautionary tale for employees

While Uber offers generous benefits to employees like RSUs, at first, they weren’t implemented with the best advantages to employees. Barbara Baksa, director of the National Association of Stock Plan Professionals, noted that Uber thought its RSUs would rise as its stock was supposed to grow.

“If you think that you’re going to IPO and the stock price is going to continue to accelerate and in six months that stock is going to be worth a lot more, then it would definitely be to the employees’ advantage to have the tax withholding done at the IPO because it would reduce their tax liability and start their capital gains earlier,” said Baska.

Parkworth Wealth Management principal Bruce Barton said that Uber and other tech companies have untraditional ways to compensate employees. Restricted stock units are part of a new compensation package.

“We’re talking about large private companies that got very large, very fast and had to adopt this nontypical way to compensate employees. They’re still experimenting,” said Barton.

Uber offers generous RSUs, but employees must be aware of the possible tax responsibilities they may have when they receive them.

3. Apple

Apple stock rises during COVID-19

The tech giant’s stock skyrocketed by 46%, during the nationwide shutdown. Credit Suisse analyst Matthew Cabral raised his price target on Apple stock because the company’s App revenue grew 35% over the last few months.

“Despite a slow start, increased screen time amid widespread ‘stay at home’ measures is now translating into a rapid acceleration in App Store revenue,” wrote Cabral in a note to clients.

“We’re[Credit Suisse] encouraged by building App Store momentum, both as evidence of Apple’s ability to increasingly monetize its nearly 1 billion iPhone user base and in support of multiple expansion for the stock as the mix shifts to higher-quality, more recurring revenue,” added Cabral.

Apple stock

Evercore ISI analyst Amit Daryanani also expects Apple stock to rise as customers buy more Apple Watches and other devices.

“We expect wearables and services to sustain double digit growth driven by uptick in [average revenue per user] and better monetization of the install base,”  said Daryanani.

Daryanani also expects Apple stock to outperform as the corporation recently announced that it would make its own chips in-house.

“It is encouraging that Apple continues to demonstrate its leading chip design capabilities as in-housing semi design remains key to product margin expansion,” noted Daryanani.

Apple’s restricted stock units expanded to many employees

Apple (NASDAQ:AAPL) has a generous restricted stock unit package for employees. The RSUs were implemented by CEO Tim Cook in 2018.

The tech company revealed that it will offer $2500 in restricted stock units to some employees. Cook explained the RSU compensation in an email.

“To show our support for our team and our confidence in Apple’s future, we’ll be issuing a grant of $2,500 in restricted stock units to all individual contributors and management up to and including Senior Managers worldwide. Both full-time and part-time employees across all aspects of Apple’s business are eligible,” said Cook.

While many employees received many RSUs, Cook benefitted the most from restricted stock units. When he reached the five-year mark of leading Apple, he gained 700,000 RSUs as part of a whopping $100 million bonus compensation deal.

Apple RSUs can be beneficial to part-time and full-time employees if they stay with the company for the long haul.

4. Verizon

Verizon(NYSE:VZ) offers substantial restricted stock units to employees. The phone company’s early adoption of 5G technology and high-paying dividend make the stock attractive to Goldman Sachs analysts. The analysts rate Verizon as a buy.

“We add Buy-rated VZ to the Conviction List as we see the stock offering investors the most attractive combination of total return and risk owing to its stable wireless business, well-covered dividend (4.6% yield) and strong balance sheet,” noted the analysts.

Verizon stock

“We believe Verizon’s financial performance will not be materially impacted by a short-term economic shock. This is because a large majority Verizon’s revenues come from selling wireless connectivity services to consumers and businesses in the US,” added Goldman Sachs.

Verizon’s restricted stock units help employees

Verizon’s” Stock Together” program gives RSUs to its employees. Verizon RSUs have a three-year vesting period. On a graded vesting schedule, workers receive one-third of the units on the anniversaries of the date they started with Verizon. In order to receive the RSUs, an employee has to stay through the entire vesting period. If an employee leaves before the vesting period is over, an employee can get the RSUs depending on the reason they left.

In the Verizon RSU program, the amount awarded to employees depends on certain factors. Verizon gives the restricted stock units after dividing the employee’s fixed dollar amount by Verizon’s stock price at the end of the vesting date.

If an employee’s award amount is $3,000 and Verizon’s stock price on the vesting date is $50, the equation is 3,000/50. In that equation, 3,000/50=60. So, a Verizon employee will receive 60 RSUs at the end of each vesting date.

5. Bank of America

Despite the difficulty banks had during the recession, Bank of America (NYSE:BAC) still had a strong Q1 2020. The bank’s CEO, Brian Moynihan, touted the company’s $22.8 billion revenue.

Bank of America stock

“Our results reflect the strength of our balance sheet, the diversity of our earnings, and the resilience of our teammates to serve clients around the world. Despite increasing our loan loss reserves, we earned $4 billion this quarter’,” said Moynihan.

Bank of America offers large RSU bonuses to employees

During the bull market of 2019, the Bank of America gave 200 to 500 restricted stock units to part-time and full-time employees. The RSUs are for employees that earn between $100,000-$350,000 a year. In this graded vesting period, employees are given the RSUs over four years at the same annual time. Moynihan wrote in a company email about how he wanted the RSUs to lead to employee retention.

“This stock award…will further align the role these teammates play with our continued performance and our shareholders’ objectives,” wrote Moynihan.

Even though the Bank of America is struggling during the global recession, there is still a strong RSU program for employees.

6. Microsoft

Microsoft (NYSE:MSFT) essentially pioneered the restricted stock unit program for workers. Bill Gates spoke about why he thought RSUs were better options for its employees.

“The fact is that the variation in the value of an option is just too great. I can imagine an employee going home at night and considering two wildly different possibilities with his compensation program. Either he can buy six summer homes or no summer homes. Either he can send his kids to college 50 times, or no times,” said Gates.

Microsoft stock

“The variation is huge; much greater than most employees have an appetite for. And so as soon as they saw that options could go both ways, we proposed an economic equivalent. So what we do now is give shares, not options,” added Gates.

Microsoft stock struggles after closing physical stores

While Microsoft stock rose 45% after physically closing stores, the company’s stock dipped 2% after permanently closing the stores. Despite the slight decline, Microsoft Corporate Vice President David Porter said the closures signal a more cloud-based system to help customers.

“It is a new day for how Microsoft Store team members will serve all customers,” said Porter. “We are energized about the opportunity to innovate in how we engage with all customers, maximize our talent for greatest impact, and most importantly help our valued customers achieve more,” said Porter.

Microsoft restricted stock unit vesting schedule

Despite the drop in Microsoft stock, the Microsoft RSUs are still significant. The restricted stock units are granted every August . After three months, new RSUs are vested five percent over five years. Employees with older grants have them vested 10% every six months in the five year vesting period.

Microsoft’s restricted unit stock system has long been a benefit to its workers.

7. Starbucks

Analysts bullish on Starbucks after stock rise

Starbucks’ growth potential in the next quarter has garnered the attention of financial experts. The investment firm Ensemble Capital, says the coffee company’s stock is a buy. Ensemble Capital is bullish on Starbucks even though many stores were closed during the COVID-19 pandemic. Ensemble Capital believes Starbucks stock can rebound once the economy re-opens this summer.

“Starbucks, which nearly tagged $100 a share over the summer as investors finally realized that the company could return to solid levels of same store sales growth, backed off earlier in the quarter before another strong quarter of same store sales growth in both the US and China reminded investors just how dominant this company actually is,” wrote Ensemble Capital.

RSU’s from Starbucks pay off quickly

Starbucks’ RSU’s are very generous. The coffee giant’s Bean Stock program gives restricted stock units to employees. CEO Howard Schultz increased the benefit in 2016. He touted the plan in a statement.

“Every day, I strive to build the kind of company that my father never had a chance to work for, one that not only cares for its people but gives them opportunities to be their best selves,” wrote Schultz in his statement.

The RSU’s vest over a two-year period. In the graded schedule, 50% of the units vest a year after an employee starts working for the coffee company. After the second anniversary of a worker’s tenure, the other 50% of the restricted stock units vest.

If an employee leaves before all the units vest, all the vested RSUs are for the employees to keep. When there are unvested restricted stock units, they are forfeited once a worker leaves the corporation.

Starbucks stock

Starbucks’ RSUs pay off for employees in a shorter period of time than other corporations. Schultz has created a restricted stock unit system that greatly helps its employees.

8. IBM

The tech company IBM( NYSE: IBM) saw its stock rise as it bought the tech company Red Hat. Red Hat’s sales increased 18% from a year earlier after the acquisition. Victoria Greene, an analyst with G Squared Private Wealth, rates IBM stock a buy. She praises the company’s focus on cloud-based technology.

“IBM’s AI is leaps and bounds ahead of competitors since they have invested heavily in it for 10 years,” said Greene.

IBM’s restricted stock units benefit employees and CEO

Because of IBM’s strong stock, the corporation’s employees receive restricted stock units over a four-year vesting schedule. The RSUs vest at 25% each year on a graded schedule. The tech company’s CEO, Arvind Krishna, gets a similar deal to his employees. IBM detailed its RSU vesting period.

IBM stock

“RSUs will vest 25% on June 8, 2021, 2022, 2023 and 2024, provided Krishna is an active IBM employee on these dates ( unless certain requirements are met to be eligible for continued vesting. PSUs will be adjusted based on performance and will be paid out in February 2023,” noted IBM in its SEC (Securities and Exchange Commission) filings.

IBM’s graded vesting period enables employees and its CEO to reap many benefits from its compensation package.

9. Facebook

Facebook stock tumbles on ad boycott

A free speech debate is affecting Facebook stock. Facebook stock fell slightly after many companies are refusing to place ads on the social media company’s site to protest a Facebook policy. Facebook won’t take down controversial posts that are considered hate speech or misleading political ads by the companies.

The corporation pledged that it was trying to weed out misinformation on the site.

“We invest billions of dollars each year to keep our community safe and continuously work with outside experts to review and update our policies. We know we have more work to do,” said a Facebook spokesperson.

Despite the controversy, Rohit Kulkarni, executive director at MKM Partners says that the ad boycott of companies like Proctor & Gamble won’t greatly affect Facebook stock.

Facebook stock

“Procter & Gamble is the largest advertiser in the world, but we think it accounts for less than 0.50% of FB’s revenues,” said Kulkarni.

Kulkarni agrees with Wall Street’s projections for 7% Q3 2020 growth.

“We believe near-term[Wall] Street estimates are reasonable and that there is upside potential given ad market recovery,” said Kulkarni.

Facebook RSUs helpful to workers

Despite the negative publicity, Facebook’s restricted stock units are beneficial to its employees. In Facebook’s RSU vesting period, the units vest on a quarterly schedule. In the graded vesting period, the employees vest 6.25% every three months. After vesting 25% a year, the RSU’s are fully vested after four years.

10. Intel

After the news that the aforementioned Apple was dropping Intel as a chip maker for its devices, Intel stock dropped. Despite the severance of their relationship, Intel took the partnership ending well.

“Apple is a customer across several areas of business, and we will continue to support them. Intel remains focused on delivering the most advanced PC experiences and a wide range of technology choices that redefine computing,” said Intel in a statement.

Despite the decline, some financial analysts want investors to buy the dip. Goldman Sachs rates Intel as a buy. The analysts say that more use of devices during the nationwide quarantine helped Intel.

“Despite the headwinds related to Covid-19, we are maintaining our estimates as we believe there are multiple near-term positive developments (i.e., potential strength/resilience in the high-end client CPU[ computer processing unit] and server CPU markets given a growing number of people working/studying from home) that could largely offset the headwinds (i.e., weaker consumption and enterprise spending),” wrote the analysts in a note.

Intel RSUs help employees even when they retire

The chipmaker’s restricted stock unit program is generous to employees. Intel RSUs distribute on a graded vested schedule. The restricted stock units vest at 25% over four years.

If retirees have unvested RSUs at the time of their retirement, they receive one extra year of vesting. That occurs for every five years of employment with Intel.

Intel’s restricted stock units are beneficial to workers even at the ends of their careers.

Restricted stock units a pivotal part of employee compensation

Corporations offer RSUs as a way to reward and retain employees. While it may not seem relevant to investors, they are connected. If a stock performs well, they can offer more benefits to employees and investors. With TradingSim charts and analysis, investors can find the best stocks that pay the best restricted stock units to its employees.

Investing in Pure Play Businesses

Pure play businesses are becoming safer investment options in this uncertain time of COVID-19. These corporations that offer one product can be great investments. But what is the complete picture of pure play? This TradingSim article will explain what a pure play stock is and how their business models work. This article will also pick the top 10 pure play businesses investors can choose.

What is a pure play stock?

A pure play business focuses on selling only one product. For example, Starbucks (NYSE:SBUX) stock just specializes in coffee. Tiffany &Co. (NYSE:TIF) stock focuses exclusively on luxury jewelry. Many pure play businesses are value stocks because they are able to excel in one field.

What is a pure play business model?

A pure play business model helps a company stand out. For example, if a company like Tesla (NASDAQ:TSLA) only produces electric cars, it can have an advantage over Ford (NYSE:F). Tesla noticed its difference from other car stocks in its IPO prospectus.

“We design, develop, manufacture and sell high-performance fully electric vehicles and advanced electric vehicle powertrain components. We have intentionally departed from the traditional automotive industry model by both exclusively focusing on electric powertrain technology and owning our vehicle sales and service network,” said Tesla in its IPO launch.

As opposed to diversified stocks, pure play stocks focus on one specific sector. While Coca-Cola(NYSE:KO) is purely a beverage company, Pepsi (NASDAQ:PEP) has food and drink products.

Tesla stands apart with its business model

Tesla

Because Tesla focuses on electric cars, Tesla can have more control of production of its vehicles. Founder Elon Musk noted that being selective about Tesla’s car production helped the company stand out.

Tesla stock is pure play business

“If we could have [mass marketed] our first product, we would have, but that was simply impossible to achieve for a startup company that had never built a car and that had one technology iteration,” said Musk.

In addition to dominance in production, Tesla’s business model means that the corporation can have more direct interaction with customers. In opposition to car companies that sell through dealerships, Tesla sells its vehicles directly to customers in its own. That enables Tesla to reach a large number of customers.

Tesla also offers its own charging stations for its vehicles. That insular production of electric vehicle accessories also helps the company’s singular pure play business model.

Is pure play a good investment strategy?

As an investment strategy, pure play can be effective. There are some advantages to having a pure play stock strategy. For beginning investors, pure play stocks can have an analysis that’s easier to understand.

What are the benefits of trading pure play stocks?

If a trader is investing in Coke, they just have to follow trends in the beverage industry. With Coca-Cola stock, the company’s revenue stream and business model are easy to understand.

However, with Pepsi, there are many different food and drink sectors to track. In a diversified stock, there are varied metrics to measure. Because they tend to dominate certain industries, if they perform well, they can pay off larger dividends for investors. In a bull market, pure play stocks can enjoy a longer period of high returns, especially if they’re growth stocks.

What are the risks in trading pure play stocks?

While there are benefits to pure play, there are downsides as well. If an industry is struggling, then a pure play stock will likely tumble. After COVID-19 shut down the cruise industry, Royal Caribbean( NYSE:RCL) stock fell by double digits. Exposure to one industry can also hurt investors in a bear market when stocks are falling. Pure play investing can be riskier because there is less protection against a decline in stock prices.

What are the top 10 pure play stocks?

The following stocks are some of the most effective pure play businesses. These stocks can pay off for investors with their focus in a specific industry.

1. Netflix

Netflix(NASDAQ:NFLX) is perhaps the most successful pure play stock in the stock market today. Even though the company started as a DVD rental service , the company moved on to dominate the streaming entertainment space.

When Netflix started, co-founders Reed Hastings and Mark Randolph wanted just wanted to create a mail-order DVD rental service.

“We were sitting down having coffee one morning in Santa Cruz and we were talking about whether or not you could mail a DVD in a first-class envelope or not,” Randolph remembers.

Netflix already was a pure play DVD service. When movie downloads became popular, Hastings knew that he wanted Netflix to evolve to streaming video.

“Movies over the internet are coming, and at some point it will become big business,” said Hastings in an interview.

“We started investing 1 percent to 2 percent of revenue every year in downloading, and I think it’s tremendously exciting because it will fundamentally lower our mailing costs. We want to be ready when video-on-demand happens. That’s why the company is called Netflix, not DVD-by-Mail,”, added Hastings.

Netflix stock the week of March 12

Even though Netflix added 16 million subscribers in Q1 2020, Hastings noted that he was uncertain how Q2 2020 earnings would be in the future. With the economy re-opening, Hastings thinks there will be fewer subscribers staying at home.

“We don’t use the words guess and guesswork lightly. We use them because it’s a bunch of us feeling the wind and it’s hard to say. But again, will internet entertainment be more and more important over the next five years? Nothing’s changed in that,” said Hastings.

Analysts bullish on Netflix stock

Despite Hastings’ uncertainty, many financial analysts think Netflix will increase its subscriber base. Analysts at Jefferies rate Netflix as a buy. Because of the company’s international growth, Jefferies analysts wrote in a note to clients that Netflix should perform well in Q2 2020 even if subscription rates increase.

“Importantly, our revenue growth assumes a 15% subscriber CAGR[ and just a 3% ARPU [average revenue per user] CAGR(compound annual growth rate), mitigating the bear thesis that sizable price hikes are necessary,” wrote the analysts.

The Jefferies analysts also noted that they believe that Netflix’s positive operating cash flow will help the corporation remain profitable.

“We believe NFLX[Netflix] will soon reach sustained FCF[free cash flow] profitability, in which it will be able to self-fund content and become less reliant on tapping the capital markets,” wrote the analysts.

Netflix’s pure play business model of focusing on streaming entertainment has paid off. Investors looking for a successful pure play stock can pick the streaming company’s stock.

2.Coca-Cola

Coca-Cola (NYSE:KO) is a classic example of a pure play business. The corporation focuses exclusively on selling its syrup to other bottling companies to manufacture.

Coca-Cola produces about 500 beverages. As customers turn away from sugary drinks, the company is branching out into energy drinks, bottled water, tea, and coffee. By putting more of the bottling and manufacturing responsibilities to outside sources, Coke has become very profitable.

Coca-Cola impacted by nationwide shutdown

While Coca-Cola is a top pure play stock, the nationwide shutdown has hurt Coke’s sales. Many Coke sales are through restaurants and sporting events. With the closure of restaurants and cancellation of games, Coke’s revenue dropped 1% to $860 billion. Coca-Cola’s CEO, James Quincey, said that with the coronavirus outbreak shutting down businesses, he wasn’t sure how the company’s future results would be.

Coca-Cola stock

“The ultimate impact on the second quarter and full-year 2020 is unknown at this time, as it will depend heavily on the duration of social distancing and shelter-in-place mandates, as well as the substance and pace of macroeconomic recovery. However, the impact to the second quarter will be material,” said Quincey.

Quincey also noted that despite the sluggish results, Coca-Cola is poised to recover.

‘We’ve been through challenging times before as a company, and we believe we’re well-positioned to manage through and emerge stronger,” said Quincey.

Coca-Cola a strong pure play stock to financial experts

Even though Coca-Cola’s Q1 2020 results were disappointing, financial experts still rate Coke stock as a buy. Financial analyst Nicholas Johnson is bullish on the beverage company.

“Despite solid first-quarter results, management opted against issuing formal guidance, and its commentary seemed to portend a pretty ugly second quarter. Nevertheless, we remain confident in the Coca-Cola system’s strategic advantage and believe the right tactical competencies are in place to allow the firm to navigate disparate dynamics across its territories,” said Johnson.

HSBC analyst Carlos Laboy also rates Coke as a buy. He believes that Coke will recover as European and American bottlers re-open their factories. He believes the bottlers are “poised to accelerate their growth contribution [to Coca-Cola’s profits] as they grow into market developers with better tools and a richer service culture.”

Warren Buffett values Coke’s pure play stock

Legendary investor Warren Buffett is a long-time Coke investor. Buffett’s Berkshire Hathaway has $18 billion invested in Coke. Buffett owns 9% of Coca-Cola’s stock because it’s a globally renowned brand with a substantial dividend payout of 3.5%. As a pure play beverage company, Coke’s low debt and reliable dividend makes it a stable choice for investors.

3.Chewy

Chewy(NYSE:CHWY) is a pure play e-commerce company that focuses on a subscription-based service for pet food and supplies. Chewy’s business model is to add a personal touch to its customer service. They’re so hands-on with their customers that they even send portraits to customers of their pets.

Since the company went public, pet parents have helped Chewy have a strong Q1 2020 earnings report. Sales grew 46% year-over-year to $1.62 billion. Chewy CEO Sumit Singh commented on the pet food company’s robust revenue report.

“We had a strong start to 2020 with first-quarter net sales increasing 46 percent year-over-year and gross margins expanding 50 basis points,” said Singh.

Singh observed that more customer spending through its subscription service helped Chewy’s profits.

“Higher spending from our existing customers and growing Autoship sales reflect strong business momentum as more customers continue to shift their spending to Chewy, driving increased basket size and higher repeat purchase activity,” said Singh.

Singh also spoke about how Chewy is poised to expand with more people adopting pets.

Chewy stock

“We are proud to be the e-tailer of choice for millions of new and existing pet parents during this unprecedented time. Chewy is well-positioned to thrive in this expanded marketplace, and we remain focused, as always, on our mission of becoming the most trusted and convenient online destination for pet parents (and partners) everywhere,” added Singh.

With an increase in pet adoption during the quarantine, Chewy stock enjoyed a whopping 75% increase so far this year.

Chewy stock a buy for RBC Capital

As a successful pet supply pure play stock, Chewy is a buy for financial analysts. RBC Capital’s Mark Mahaney rates Chewy as a top pure play stock in a note to clients.

“Importantly, CHWY’s [NYSE:CHWY] results and outlook suggest to us that the company is at an inflection point and that it is a structural winner from the COVID crisis,” wrote Mahaney.

Mahaney expects Chewy stock to rise as pet adoptions continue to increase.

“Pet product purchases have meaningfully accelerated their online adoption, and we don’t expect a reversion,” said Mahaney.

Some financial experts neutral on Chewy stock

While RBC Capital is bullish on Chewy stock, some financial analysts are neutral on the stock. Jefferies analyst Brent Thill rates Chewy stock as a hold despite its positive earnings report and its“position as a key beneficiary of a shift to online in essential categories (like pet) driven by the pandemic.”

Thill rated Chewy stock as a hold because of the company’s reduced full-year guidance with the unpredictability of the economy later this year. His hold rating is “likely a reflection of Chewy being pragmatic during heightened uncertainty.”

Chewy’s a pure play stock that investors can pick for results. Its dedicated customer service and promising profits make Chewy stock a top pure play

4.Beyond Meat

Beyond Meat(NYSE:BYND) is a pure play meat alternative producer that is performing well. Despite the COVID-19 crisis diminishing sales in restaurants, chief marketing officer Mark Nelson touted the positive Q1 2020 results.

“We maintained our solid top-line momentum while driving our best-ever performance in production unit cost per pound,” said Nelson.

“Despite near-term challenges ahead stemming from the ongoing global health crisis, our improving operating results and continued strength of our balance sheet give us added confidence about the Company’s long-term financial position,” added Nelson.

Analysts bullish on Beyond Meat

Because of Beyond Meat’s positive Q1 2020 results, many financial analysts are bullish on Beyond Meats stock. Steven Strycula of UBS rates Beyond Meat stock as a buy. He asserts that because many restaurants were closed during the quarantine, Beyond Meat can still be sold in grocery stores.

Beyond Meat stock

“With food service industry traffic down, BYND plans to lean-on its retail platform to drive growth and is repurposing production capacity to meet demand,” wrote Strycula in a note to clients.

He also believes that Beyond Meat will also benefit from rising beef prices.

“BYND[Beyond Meat] seeks to use value packs & increased trade to stimulate trial, particularly as beef prices spike,” added Strycula.

Beyond Meat is a pure play plant-based meat alternative that has found success by catering to customers who want healthier eating options.

5. Trulieve Cannabis

With a rise in cannabis sales during COVID-19, (CSE:TCNNF) Trulieve Cannabis (CSE:TRUL) is a pure play pot stock that’s outperforming its competition. The Florida-based company has built a loyal customer following by promptly responding to customers’ needs. CEO Kim Rivers notes that Trulieve’s pure play business model works because Trulieve reaches out personally to customers.

“One of our mottos at Trulieve is that we grow one patient at a time. In Florida, our patient base are some of the most vulnerable population, and it’s really important that we respond to them not only in a timely manner, but in a very compassionate manner,” said Rivers.

Trulieve Cannabis stock

“I think it’s incredibly important, especially in this current phase, for us to be very, very connected with our patient base and responsive in setting that high level of customer service experience. I’m very proud of our team and our ability to be responsive in real-time to patients,” added Rivers.

Trulieve profits soar by triple digits

In Trulieve’s Q4 2019 results, the pot producer earned $79.7 million. That amount shows a whopping 146% increase over Q4 2018. Rivers commented on the positive revenue report.

“Our fourth-quarter results reflect our strong brand and customer loyalty, which were key factors in our success for the year. We continued to grow our footprint in Florida and made significant strides building out the infrastructure needed to maximize efficiencies and achieve economies of scale,” stated Rivers.

Rivers also touted Trulieve’s positive cash flow and expansion of dispensaries.

“Trulieve’s execution of key fundamentals and financial discipline coupled with market share growth this quarter contributed to positive free cash flow, further strengthening our balance sheet and validating our financial stewardship,” added Rivers.

Trulieve a pure play buy for Wall Street analysts

According to financial analysts, Trulieve stock is a strong buy. Many analysts polled by the TipRanks website say shares should rise by 68%. With a bullish outlook from investors and an effective pure play business model, Trulieve could be a top marijuana stock for investors.

6. Salesforce

Salesforce(NYSE:CRM) is a pure play customer relationship management solution company. The company’s successful business model comes from its early adoption of cloud technology. In addition to offering its own cloud services to customers, Salesforce added customers by letting them build apps on Salesforce as well.

Salesforce’s CEO, Marc Benioff, noted that he wanted to make cloud technology and customer relationship technology easily accessible.

“This [cloud delivery] model made software similar to a utility, akin to paying a monthly electric bill. Why couldn’t customers pay a monthly bill for a service that would run business applications whenever and wherever?”

The corporation had a positive Q1 2021 earnings report with $4 billion in revenue despite the coronavirus outbreak.

Salesforce stock falls but is still top pure play business

Benioff spoke about the company’s results.

“Our results, amidst this global crisis, demonstrated our ability to execute at speed, innovate at scale and the strength of our business model,” said Marc Benioff, Chair & CEO, Salesforce.

Benioff also noted that the company is still making changes during the COVID-19 era.

“We made long-term investments in keeping our employees safe, supporting our customers, delivering crucial innovation like Work.com, and helping our communities with PPE, grants, and technology. The pandemic showed us that digital is an imperative for every company, and we’re confident Salesforce will continue to accelerate as we bring our customers into the new normal,” said Benioff.

Jefferies rates Salesforce as a buy

Jefferies analyst Brent Thill believes Salesforce is a buy. He thinks that the company can continue to be profitable after its recent purchase of analytics platform Tableau. The deal was reportedly worth $16 billion.

“We[Jefferies] believe we saw a meaningful acceleration in M&A in 2019, and CRM needs to take a breather to digest the Tableau deal, the biggest one so far,” said Thill.  

Thill thinks that Tableau’s integration with Salesforce is critical before Salesforce acquires more businesses.

“CRM needs to make sure the integration between the various clouds is seamless before embarking on more M&A,” said Thill.

Thill notes that Salesforce stock will grow because of more businesses using cloud technology because of work-from-home orders.

“We[Jefferies] continue to be positive on CRM and believe there is ample value to unlock. [The long-term] pipeline is robust. We also believe COVID-19 has been accelerator driving more businesses to the cloud,  which should benefit CRM,” said Thill.

Salesforce a SaaS pure play stock pick

Salesforce is a successful pure play SaaS( software-as-a-service) company. Morningstar financial analyst Dan Romanoff also agrees that Salesforce is a top pure play stock because of its business model.

“We[Morningstar] believe Salesforce.com represents one of best long-term growth stories in software. After introducing the software-as-a-service model to the world, Salesforce.com has assembled a front-office empire that it can build on for years to come,” said Romanoff.

Like Thill, Abramoff believes that Salesforce’s pure play business model will grow once the corporation integrates the services of Tableau, its latest acquisition.

Salesforce should “benefit further from natural cross-selling among its clouds, upselling more robust features within product lines, pricing actions, international growth, and continued acquisitions,”.

“The tight integration among the [company’s] solutions and the natural fit they have with one another makes for a powerful value proposition,” added Abramoff.

Salesforce has been helping businesses keep track of customer service in the cloud for years. Its customer relationship management dominance makes Salesforce stock a top pure play choice for traders.

7. Starbucks

Starbucks stock (NYSE:SBUX) is a pure play business that dominates the coffee industry. The Seattle-based coffee company made rare gourmet coffee an everyday treat in its business model. The fast expansion of stores and diverse mix of coffee flavors all helped Starbucks become a top pure play stock.

Starbucks has mixed Q2 2020 results

Because of the COVID-19 crisis, Starbucks CEO Kevin Johnson said that revenue fell to $6 billion. Many Starbucks stores closed down during the pandemic, so Starbucks’ sales slowed.

“As a result, consolidated revenue in Q2 was $6 billion, reflecting a 5% decline compared to prior year, primarily due to a 10% contraction in comparable store sales globally, ” said Johnson.

Chief financial officer Patrick Grismer also noted that US sales declined because of the pandemic.

Starbucks stock

“Revenue for our Americas segment was flat in Q2 relative to the prior year at $4.3 billion as incremental sales from net new store growth of 3% over the past 12 months was effectively offset by a 3% decline in comparable store sales,” said Grismer.

While Starbucks had disappointing results, the coffee behemoth did have an increase in its customer loyalty program Starbucks Rewards. Grismer noted that the program had an increase in members.

“Of note, during the second quarter, 90-day active Starbucks Rewards members, our highly routinized, highly engaged and loyal customer base with whom we can directly communicate digitally, increased to 19.4 million in the US, up 15% from a year ago,” said Grismer.

Some analysts rate Starbucks a pure play buy

Despite the sales slump, Broyhill Asset Management, a boutique investment firm, is bullish on Starbucks stock. Broyhill is optimistic that its Chinese stores will re-open soon.

“Starbucks (SBUX) was one of the first US companies to warn investors of the financial hit from the pandemic. But after closing nearly 80% of its stores in China by early February, the company had already re-opened roughly 95% of those stores by March month-end,” said Broyhill.

“We established a position in the stock near it’s lowest valuation in years as we gained confidence that the company’s China stores would fully recover in a couple quarters. In the near term, mobile orders (which represented ~ 80% of China’s sales mix in the last weeks of February) should put a floor under US sales, while the resumption of development in China, with best-in-class unit economics, provides a multi-year runway for expansion,” added Broyhill.

Financial expert Matthew McCall also thinks Starbucks stock is a buy even if Starbucks stock is falling. He wants investors to buy the dip because it’s “a high-quality, well-run company. That should put it on investors’ radar for buy on dips.”

Because Starbucks is a massively popular brand that has many loyal customers, investors can choose Starbucks stock as a pure play coffee stock.

8. Activision Blizzard

Activision Blizzard(NYSE:ATVI) is a gaming pure play stock that has outperformed during the quarantine. With many people stuck inside, Activision monthly users rose 18% . Gamers rushed to play the new Call of Duty game and played mobile games like Candy Crush more as well.

Because of the rise in gaming, the company had a positive Q1 2020 earnings report. Dennis Durkin, Activision’s chief financial officer, spoke about the results.

“Activision revenue was $519 million growing 64% year-over-year. Growth was driven by Call of Duty: Modern Warfare and Warzone in-game revenues, strong game sales of premium Modern Warfare and the addition of Call of Duty Mobile. Operating income was $184 million with an operating margin of 35%, 12 percentage points higher year-over-year,” said Durkin.

Activision stock

While some many say Activision is too dependent on a few gaming franchises like Call of Duty and World of Warcraft, CEO Bobby Kotick thinks the pure play gaming business strategy is still profitable.

“At a time when so many forms of social interactions and entertainment experiences have been shut down, we’re providing entertainment with positive impact for hundreds of millions of people through our games,” said Kotick.

Activision a buy for financial experts

Because of Activision’s dominance as a pure play stock, many financial analysts rate Activision as a buy. Todd Gordon, managing director at Ascent Wealth Partners, is bullish on Activision stock.

“It’s[Activision] a $46 billion market cap. They’ve got franchises like Call of Duty and Candy Crush. They have a better share of mobile gaming. Activision is well-represented across multiple platforms including PC, console, gaming, stuff like that. So, we hold Activision in our global growth portfolio,” said Gordon.

Danielle Shay, director of options at Simpler Trading, also thinks Activision is a pure play stock that investors should choose. She thinks that Activision is a buy because there is an increase in gaming during the quarantine.

“More people are staying at home, they’re looking for entertainment and options at home, and with the client base that these two companies [Activison and another gaming pure play stock Two Play] already have, I think this is going to be fantastic for them,”  said Shay.

With a focus on popular games and increased customers, Activision is a successful gaming pure play stock.

9. Peloton

Like Activision, Peloton(NYSE:PTON) is a pure play company that’s benefitted from the pandemic shutdown. The exercise bike company’s stock has skyrocketed 100% over the last few months as it attracts more customers.

Peloton’s business model comes from combining an old-school exercise bike with new technology of subscription-based online classes. Founder and CEO John Foley noted that Peloton’s pure play business model ties fitness with tech.

“Peloton is so much more than a Bike — we believe we have the opportunity to create one of the most innovative global technology platforms of our time,” Foley says. “It is an opportunity to create one of the most important and influential interactive media companies in the world; a media company that changes lives, inspires greatness, and unites people,” said Foley.

Peloton has robust Q3 2020 earnings report

Peloton’s Q3 2020 earnings report showed revenue growth from an increase in longer free trial subscriptions to its video service. Foley touted Peloton’s better-than-expected results.

“Early in the COVID crisis, we extended the digital subscription free trial period from 30 days to 90 days resulting in over 1.1 million downloads of Peloton Digital in the past six weeks. We were extremely proud to offer so many people free access to our incredible fitness content during this time,” said Foley.

“I am also proud of our financial performance this quarter with revenue growing 66% year-over-year to $524.6 million. With strong revenue flow through and leverage against our fixed costs, we achieved our first adjusted EBITDA positive quarter as a public company in Q3 with an adjusted EBITDA margin of 4.5%,” added Foley.

Peloton a strong pure play buy for some analysts

With Peloton’s strong revenue result, Wall Street analysts are raising their target price for the exercise bike’s stock. Cowen upped its Peloton price target from $54 to $70.

Cowen noted that Peloton is “helped by the pandemic, alongside marketing & logistics efficiencies. PTON(Peloton) also benefits from multi-year secular tailwinds behind the connected home fitness trend that PTON is pioneering. We raised FY20 to FY30 estimates and rolled DCF[discounted cash flow] to ’21; PT[price target] to $70 from $54, maintain Outperform.”

Analyst Todd Gordon noted that Peloton’s pure play business model helped the company succeed more than other fitness companies.

“This company was a first mover. It succeeded in the online fitness and social communities, unlike the other ones [with] hardware offerings like GoPro and Fitbit that I don’t think capitalized. They have a loyal customer base, high retention levels, and good margins from the subscription business”, said Gordon.

Some Wall Street analysts bearish on Peloton

While some analysts are bullish on Peloton, some financial experts are bearish on the pure play business. Gina Sanchez, CEO of Chantico Global, thinks that the company is facing stiff competition from other fitness equipment companies.

“It’s not just facing competition from SoulCycle. It’s is also facing competition from other bike makers like NordicTrack, Echelon, ProForm who are all forming their own studio offerings to help give a Peloton-like experience. They are a pioneer in this space but they’re also opening up the space for a lot of competitors,” said Sanchez.

Peloton is a fitness pure play stock that investors can choose to add to their portfolios.

10. Stitch Fix

Like Peloton, Stitch Fix (NYSE:SFIX) has a successful subscription-based service. The pure play e-commerce business has been booming since April as people are cleaning out their closets and updating their wardrobes.

Founder and CEO Katrina Lake noted that Stitch Fix’s strategy is to combine personalized shopping experiences with data science.

“We send you clothing and accessories we think you’ll like; you keep the items you want and send the others back. We leverage data science to deliver personalization at scale, transcending traditional brick-and-mortar and e-commerce retail experiences,” said Lake.

Stitch Fix a successful pure play e-commerce stock

Because of its combination of personalized customer service and data analytics, Stitch Fix’s Q1 2020 earnings report showed growth in clients. Lake commented on the results.

“We had another quarter of great momentum in Q1, delivering net revenue of $445 million, exceeding guidance and representing 21% year-over-year growth. We grew our active clients to 3.4 million, an increase of 17% year over year. Demonstrating the power of our data science, we continued to delight our clients, growing revenue per active client by 10% year over year, our sixth consecutive quarter of growth,” said Lake.

Analysts mixed on Stitch Fix stock

While Stitch Fix had a positive earnings report, the company had a sales decline in March. Because of the nationwide shutdown, some warehouses closed and many order couldn’t be filled as quickly. Because of the setback, many analysts like RBC Capital’s Mark Mahaney wrote a note to his clients about concerns about the pure play business.

“Given the COVID disruption, we expect weaker new/infrequent client conversions and the UK rollout to continue be challenged”, wrote Mahaney.

SunTrust Robinson analyst Youssef Squali is more bullish on the Stitch Fix stock. He believes that the company has an advantage with strong growth potential in ecommerce.

“We[SunTrust Robinson] remain bullish on the stock however, given SFIX’s strong competitive position in the structurally challenged Retail, robust unit economics, strong growth/margin potential in FY21 and beyond, and compelling valuation,” noted Squali.

Stitch Fix stock

Pure play businesses can have pivotal stocks for investors

Pure play businesses can have stocks that can pay off for investors. While pure play stocks carry risk, the stocks mentioned above persevered because of their uniqueness and innovation. With TradingSim charts and analysis, investors can find the best pure play businesses to add to their portfolios.