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Is Amazon a better retail choice than Target?

Is Amazon a better retail choice than Target?

We believe Amazon (NASDAQ: AMZN) is a better choice than its peer Target (NYSE: TGT). AMZN stock trades at a higher multiple of 4x sales, versus nearly 1x sales for TGT. This can be attributed to AMZN’s superior revenue growth, profitability, and financial position. There’s more to the equation, and in the sections below we’ll discuss why we think AMZN will outperform TGT over the next three years. This analysis compares several factors, including historical revenue growth, returns, and valuation. Our Dashboard Target vs Amazon: Industry peers: Which stock is a better choice? has more details about this.

1. AMZN stock has outperformed over the past three years

AMZN stock has seen a strong 20% ​​gain from levels of $165 in early January 2021 to around $199 now, versus a 15% decline for TGT stock from levels of $175 in early January 2021 to around $148 now. For comparison, the broader S&P500 is up around 50% in this roughly 3-year period. However, the rise for these stocks has been far from consistent. AMZN stock has seen returns of 2% in 2021, -50% in 2022, and 81% in 2023, while TGT stock has seen returns of 31%, -36%, and -4% respectively over these years. For comparison, returns for the S&P 500 were 27% in 2021, -19% in 2022, and 24% in 2023. This indicates that AMZN stock underperformed the S&P in 2021 and 2022, while TGT stock underperformed the S&P in 2022 and 2023.

In fact, consistently beat the S&P 500 — for better or worse — the past few years have been tough for individual stocks; for Consumer Staples sector heavyweights including WMT, PG and COST, and even for mega-cap stars GOOG, TSLA and MSFT. By contrast, the Trefis High Quality Portfolio, a collection of 30 stocks, outperformed the S&P 500 every year Over the same period. Why is that? As a group, HQ Portfolio shares delivered better returns with less risk compared to the benchmark index; it was less of a rollercoaster ride, as HQ Portfolio’s performance indicators show.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, AMZN and TGT could find themselves in a similar situation as in 2022 and underperform the S&P the next 12 months — or will they make a big jump? While we expect both stocks to trend higher, AMZN is likely to outperform TGT.

2. AMZN has seen better revenue growth

Amazon saw its sales grow at an average annual rate of 14.3% from $386.1 billion in 2020 to $574.8 billion in 2023, while Target’s sales grew at an average pace 4.9% from $93.6 billion to $107.4 billion in 2023 over the same period.

TGT’s income has benefited from the shift to e-commerce because of its longstanding omnichannel approach. Having convenient same-day business services and purchasing changes brought on by Covid-19 have also worked well for the company. The retailer invested heavily in same-day fulfillment services, including Order Pickup, Drive Up and same-day delivery with Shipt, all while leveraging its physical stores. However, the company has seen a shift in consumer sentiment and a slowdown in corporate sales since last year. Investors are cheering that expected revenue growth will accelerate in 2024, as the retailer’s FY’23 results showed the company making progress on margins despite weak sales.

AMZN’s revenue should see healthy growth as it benefits from long-term tailwinds in the e-commerce, streaming and digital advertising industries. With a whopping 38% share of all online retail sales in the U.S., Amazon is the clear leader in the e-commerce space. The company leverages its unmatched shopping platform to monetize advertising, and it also makes money when the ads lead to product sales. AMZN’s cloud computing segment, which commands the industry’s leading market share, is a key growth driver for the company, followed closely by business in the North American and international segments.

3. AMZN is more profitable

Target’s operating margin of 5.3% decreased from 2023 7.0% in 2020, while Amazon’s operating margin increased marginally from 5.9% to 6.4% over this period. When we look at the margin change over the last twelve months compared to the operating margin over the last three years, Amazon’s 1.7% it’s going better than -0.4% for Target.

When looking at financial risk, Amazon outperforms Target, with its 0% debt as a percentage of equity is less than 1.6% for the latter. Moreover, it is 16% cash as a percentage of assets is higher than 8% for Target, implying that Amazon has a better debt position and more liquidity.

4. The net of everything

We see that Amazon has shown better revenue growth, is more profitable, and has a better financial position. Looking at the outlook, we think AMZN is the better choice of the two, given its attractive valuation. We estimate Appreciation of TGT $160 per share, which represents an 8% increase from current levels of $148. Our forecast is based on a 17x P/E multiple for TGT and expected earnings of $9.35 on a per-share and adjusted basis for full-year 2024. On the other hand, we estimate AMZN Rating $213 per share, which represents a 7% increase. Our forecast is based on a 52x P/E multiple for AMZN and expected earnings of $4.12 on a per-share and adjusted basis for full year 2024.

While AMZN could outperform TGT over the next three years, it’s useful to see how Target Peers score on metrics that matter. Find other valuable comparisons for companies across industries at Comparisons with colleagues.

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