Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: Amazon vs. Home Depot

By Parkev Tatevosian – Updated Jun 5, 2020 at 8:27AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A strong brick-and-mortar retailer pitted against the e-commerce giant.

While many businesses have had to shut down as a result of COVID-19, Amazon.com (AMZN 1.20%) and Home Depot (HD -1.61%) have had the opportunity to stay open. But the two still face significant challenges, and both have made adjustments to serve customers while keeping employees safe. 

Those adjustments are hurting profits even as sales increase. The decision of which to invest in should go beyond the short-term circumstances and look at which company will likely do better over the long run. 

Amazon packages left in front of a doorstep.

Image source: Getty Images.

Amazon 

Still, it is difficult to overlook the challenges in the near term. In the release from the most recent quarterly results, CEO Jeff Bezos said, "From online shopping to [Amazon Web Services] to Prime Video and Fire TV, the current crisis is demonstrating the adaptability and durability of Amazon's business as never before, but it's also the hardest time we've ever faced." 

Overall growth for the company has been robust and doesn't appear to be slowing anytime soon. Revenue in the most recent quarter increased by 21% from a year ago. The pandemic has pushed people to shift more of their shopping to Amazon, and some of these customers will stick around even after the health crisis has run its course. 

The company already has an estimated 112 million Prime members. These customers not only pay a monthly or annual fee, but they also spend more money than other shoppers. One of the benefits of membership is Prime Video, and with the soaring demand for in-home entertainment, this feature makes the subscription even more enticing. 

The significant risks with Amazon in the near term are the increasing expenses to adjust to the coronavirus outbreak. In the first-quarter press release, Bezos said:

Under normal circumstances, in this coming Q2, we'd expect to make some $4 billion or more in operating profit. But these aren't normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on COVID-related expenses getting products to customers and keeping employees safe. 

A Home Depot associate organizing inventory.

Operating expenses rose at Home Depot, hurting net income. Image source: Getty Images.

Home Depot 

Home Depot was deemed an essential business and allowed to keep its brick-and-mortar locations open. But it did need to make several adjustments to keep its employees and customers feeling safe in its stores. The costs of those changes are adding up, and unlike Amazon, the boost in sales might be short-lived. 

The company does have over $8.6 billion cash on hand after going to the debt markets and borrowing $5 billion. That should allow it to continue investing in long-term initiatives, even while dealing with the short-term impact of COVID-19. 

On April 1, the company announced some changes: Employees are to receive increased pay, more paid time off, and will undergo temperature checks before coming to work. Simultaneously, there are limits on how many customers are allowed in a store. A spring promotion was canceled, and only essential in-home services will be performed. 

Still, sales increased in its most recent quarter by 7.1%, as people sheltering in place took on home improvement projects. But the precautions to slow the spread of the coronavirus took a toll. As a result, total operating expenses increased by 17%, and net income was down by almost 11% even though sales increased. 

The final verdict

Both Amazon and Home Depot are great companies for long-term investors. But if you had to invest in only one of these retail stocks, it should be Amazon. While both are likely to grow your wealth over time, the prospects for the e-commerce giant are better and more sustainable than those of Home Depot. 

Uncertainty will likely remain high through the rest of the year. Therefore, investors should break down the desired allocation into pieces and dollar-cost-average over several months while accumulating shares.   

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Home Depot and recommends the following options: long January 2021 $120 calls on Home Depot, short January 2021 $210 calls on Home Depot, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$115.15 (1.20%) $1.37
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$266.58 (-1.61%) $-4.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.