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Better Buy: Amazon vs. Lowe's

By Lawrence Rothman, CFA - May 6, 2021 at 8:39AM

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Which of these two giants is set to outperform?

Amazon (AMZN 0.81%) and Lowe's Companies (LOW 3.79%) are two different yet successful businesses. Both have rewarded shareholders handsomely over the years.

Amazon's stock has gained over 425% in the past five years while Lowe's has had a nearly 160% increase. These have handily beat the S&P 500 Index's 102% price rise.

The past isn't necessarily a predictor of the future, but it is comforting examining what these companies have achieved. However, investing is about the future. These are both strong companies, but which one offers a better return right now?

Digital stock chart with pen pointing to the green figures.

Image source: Getty Images.

Amazon

It's hard to believe that Amazon started as an online bookseller about 27 years ago. With a goal of being the "world's most customer-centric company," it thinks about the long term. The company now sells virtually everything online at competitive prices with fast delivery. Its popular Amazon Prime membership provides its more than 200 million members with access to quick delivery at no extra charge and access to a streaming service, all for $119 a year. There are also hardware devices like the Kindle and Alexa.

Over the last five years, sales grew from $136 billion to over $386 billion, and operating income increased by more than fivefold to $23 billion.

While last year's results were helped by increased online shopping due to the pandemic, as its long-term record attests, that wasn't the only reason Amazon has been successful. It kept the momentum going, with first-quarter sales growing by about 44% to $108.5 billion, helping more than double its operating profit to $8.9 billion.

It's not just online sales that are boosting results, either. There's the company's high-margin Amazon Web Services (AWS) business. The cloud-computing division, offering computing, data, storage, and other services, had a better than 30% sales growth and 35% increase in operating income.

As it's continuing to invest in the future, Amazon's high-growth days are far from over.

Lowe's

Lowe's is a home improvement retailer selling a range of goods and services to renters and homeowners working on their own homes, and professionals working on various-size jobs. Management has focused on improving its relationship with the last group to gain market share. Lowe's has most of its stores concentrated in the U.S., which accounts for about 94% of its sales, although there are Canadian locations.

While Lowe's growth hasn't been as impressive as Amazon's, it is nothing to sneeze at, either. Its 2020 sales were $89.6 billion, 38% higher than 2016's total. During that time, the company's operating income went from $5.8 billion to $9.6 billion.

With people stuck at home last year, they took on more projects, helping Lowe's results. For the latest fiscal year, which ended on Jan. 29, sales growth was more than 24%.

While the home improvement business is cyclical, there are signs that the U.S. economy is moving beyond the devastating economic effects caused by the pandemic, boding well for Lowe's future. With an additional round of stimulus checks, increased vaccinations, looser government restrictions, and pent-up demand, the U.S. economy grew quickly in the first quarter. Gross domestic product (GDP) growth was 6.4%.

The choice

This is a difficult decision. Amazon has been an incredible company that is still a fast grower. It constantly innovates, looking for newer and better ways to serve customers.

On the flip side, Lowe's is a more mature, slower-growing company. But it's doing well, and the better economy should help results. If you're interested in dividends, Lowe's has raised the payment annually for more than half a century, making it a Dividend King. Last August, the board of directors raised the quarterly payment by a nickel to $0.60, and the stock's dividend yield is 1.2%.

But if you have a long-term horizon and are looking for growth and capital gains, Amazon is the better stock investment.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Lowes and recommends the following options: long January 2022 $1920.0 calls on Amazon and short January 2022 $1940.0 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$144.34 (0.81%) $1.16
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$215.93 (3.79%) $7.89

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