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Better Buy: Amazon vs. Lululemon

By Demitri Kalogeropoulos - May 13, 2021 at 11:30AM

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They're both growing quickly, but which is the stronger buy today?

If you're a fan of growth stocks, you've likely considered buying Amazon (AMZN -2.86%) or lululemon athletica (LULU -3.28%) in the past. While their businesses are different, both investments have trounced the wider market over the last five years -- surging roughly 400% each since early May 2017.

Wall Street is optimistic about the companies' earnings potential over the next few years. But there are some factors that might make one a better buy for you today. Let's take a closer look.

A young woman holding a yoga pose.

Image source: Getty Images.

Booming growth

Both companies capitalized on consumer spending shifts during the pandemic. Amazon's leading position in the e-commerce space, plus its huge cloud services division, allowed it to serve a far larger pool of consumers and enterprises. Sales spiked 38% in 2020, for an extra $105 billion in revenue.

Customer traffic restrictions kept Lululemon's growth more restrained, with sales rising 11% in the past year. Still, the apparel specialist ended 2020 with a 24% revenue spike thanks to a nearly doubling of its e-commerce channel. Amazon won market share from physical retailers and e-commerce specialists, while Lululemon is outgrowing the athleisure niche.

Key differences

Amazon is a much larger and more diverse business. Lululemon is aiming for its first $5 billion sales year in 2021, but the e-commerce giant just wrapped up a $386 billion year.

Sure, that smaller base means the retailer has much room to grow. But it brings a few risks, too. Poorly received product launches might derail a fiscal year, for example. Manufacturing or supply chain challenges could push earnings lower. A sustained competitive push from rivals like Nike (NKE -2.46%) is always a threat. In comparison, Amazon's business is better established and less likely to take a surprise step backward.

On the other hand, if you prefer highly profitable businesses, Lululemon might be the stock for you. The apparel retailer has enjoyed a long streak of gross profit margin increases that was only briefly disrupted during the pandemic. A steady stream of popular product releases, combined with its industry-leading digital selling channel, helped gross profit margin inch higher in 2020 after rising in each of the prior three years.

LULU Gross Profit Margin Chart

LULU gross profit margin data by YCharts.

Lululemon's profitability stacks up well against the best in the industry and is likely to improve from here as sales tilt more toward e-commerce.

Price and value

Both stocks have roughly tracked the broader market's surge over the last year. And Wall Street has assigned similarly high valuations to the stocks. Lululemon enjoys a big premium over peer retailers like Nike and Five Below. You'll pay nearly 10 times annual sales for its business, compared to less than 6 for each of those peers.

Amazon looks just as expensive compared to other companies with large e-commerce presences, like Wayfair and Home Depot.

AMZN PS Ratio Chart

AMZN PS ratio data by YCharts.

But those premiums seem justified by the attractive prospects for Amazon's and Lululemon's sales and earnings growth over the next few years. Lululemon represents a more-concentrated bet on the athleisure apparel niche, which should make for share price volatility.

Yet each stock is likely to produce strong returns for shareholders, just as the investments have through a wide range of selling conditions over the past decade. Simply put, this one is too close to call.

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, Home Depot, and Nike. The Motley Fool owns shares of and recommends Amazon, Home Depot, Lululemon Athletica, Nike, and Wayfair. The Motley Fool recommends Five Below and recommends the following options: long January 2022 $115.0 calls on Five Below, long January 2022 $1920.0 calls on Amazon, short January 2022 $120.0 calls on Five Below, and short January 2022 $1940.0 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
$322.47 (-3.28%) $-10.95, Inc. Stock Quote, Inc.
$138.23 (-2.86%) $-4.07
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$321.32 (-1.20%) $-3.89
NIKE, Inc. Stock Quote
NIKE, Inc.
$113.16 (-2.46%) $-2.85
Five Below, Inc. Stock Quote
Five Below, Inc.
$135.98 (-4.27%) $-6.06
Wayfair Inc. Stock Quote
Wayfair Inc.
$57.01 (-20.09%) $-14.33

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

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