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Better Buy: Amazon vs. Home Depot

By Demitri Kalogeropoulos – Oct 27, 2020 at 10:15AM

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The case for buying the home improvement retailer today.

Both Amazon (AMZN 3.04%) and Home Depot (HD 0.92%) saw their stocks outperformed the market through the first three quarters of 2020. As leaders in the e-commerce and home improvement spaces, these businesses have attracted investors' attention thanks to shifts in consumer shopping priorities that lifted sales growth this year. These trends aren't likely to reverse themselves as the coronavirus threat lessens, either.

But which stock looks like the better investment right now? Each business has its attractive points, but there are some good reasons to prefer Home Depot over the e-commerce leader today.

A multichannel winner

There's no denying that Amazon is the biggest beneficiary of the shift in consumer spending toward e-commerce. That huge trend has been accelerated by the pandemic, with product sales in the first half of 2020 spiking 31% to $92 billion versus $70 billion a year earlier.

A couple shopping for appliances.

Image source: Getty Images.

Home Depot is winning here, too. Its online sales jumped 90% during that period. Yet the home improvement giant has room to continue expanding that selling channel, which today accounts for 14% of the broader business. And it's clear that the chain's multichannel retailing approach is resonating with shoppers, since most people choose to pick up their digital orders at the store.

Amazon is moving in that direction by adding physical locations and using its Whole Foods shops as fulfillment hubs. But Home Depot already owns a successful omnichannel retailing platform, which has helped it move annual sales above $110 billion (up from $66 billion in 2010), so give it the edge here.

Valuation differences

Amazon books 2 1/2 times as much revenue as Home Depot, yet the stock is valued at more than five times the home-improvement retailer's $300 billion market capitalization. That gap reflects Amazon's faster growth profile, along with the prospect of rising margins to come from its bets in areas like cloud services.

AMZN PS Ratio Chart

AMZN PS Ratio data by YCharts.

But why not choose the stock that's more profitable today? Home Depot's 14% operating margin trounces the single-digit metric that rival Lowe's has earned over the last few years. It's more than double Amazon's result, too. That extra financial strength looks even more compelling considering Amazon's elevated valuation, which sits at over $1.5 trillion right now.

Cash now or later?

Fans of instant gratification will find more to like about a Home Depot investment. The retailer pays a substantial quarterly dividend that equates to just over half of annual earnings, compared with Lowe's 35% target. Amazon doesn't pay a dividend or make aggressive use of stock buybacks. Instead, CEO Jeff Bezos and his team are happy to pour resources back into growing their major business lines in hopes of maximizing cash flow over the very long term.

That's a shareholder-friendly goal, too, but there are good reasons many investors prefer stocks with a long track record of prioritizing (and boosting) dividend payments. It gives you more control over your investment and makes management a bit more accountable, and more cautious when considering risky moves like aggressive acquisitions.

In this case, Home Depot's 2% annual dividend yield delivers those extra assurances, along with some built-in returns to buffer against those inevitable stock price downturns.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Demitri Kalogeropoulos owns shares of Amazon and Home Depot. The Motley Fool owns shares of and recommends Amazon and Home Depot. The Motley Fool recommends Lowe's and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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