Top Picks for Investment Currently: Amazon versus Home Depot
If you're searching for a decent investment spot in the consumer goods sector, you've likely thought about putting money into either Amazon (AMZN 2.23%) or Home Depot (HD 0.07%). Although they operate in different spheres, both companies have seen significant growth over the past year. (Home Depot's stock has climbed 33%, and Amazon has surged 38%, as of the current time, Nov. 19.)
Let's go over the arguments for these two heavyweights in the consumer goods market and determine which one appears to be the better pick at this moment.
The case for Amazon
Amazon commands a substantial 40% of the U.S. e-commerce market, leaving Walmart (its main rival) trailing behind with 7.4%. The company's most recent quarter showcases its dominant market position.
Amazon's sales in North America surged 11% during the third quarter (which concluded on Sept. 30), reaching $95.5 billion. Investors questioning if the company can maintain its edge against competitors need only look to Amazon's new venture, Amazon Haul. This mobile-only marketplace competes with budget marketplaces such as Shein and Temu, and all items cost less than $20.
Beyond its retail sales, Amazon's cloud computing business, Amazon Web Services (AWS), is the leader in this market, occupying 31%. Cloud computing was already experiencing rapid growth, but this expansion is being accelerated by artificial intelligence (AI). Goldman Sachs expects cloud computing to balloon into a $2 trillion market by 2030, thanks to AI.
AWS sales grew 19% during the third quarter to $27.5 billion. With AI driving more investment in cloud computing, Amazon should continue to gain from this trend.
The case for Home Depot
Home Depot recently wrapped up a successful third quarter (ended Oct. 27), surpassing Wall Street's income and revenue estimates. Revenue spiked 6.6% to $40.2 billion, outperforming analysts' forecasts of $39.3 billion. Similarly, the company's diluted GAAP earnings per share of $3.67 outpaced the anticipated $3.64.
Home Depot holds a strong position in the home improvement market, with an expected 28% share in 2023, far exceeding Lowe's (which owns 17%). Home Depot's robust operating margins are particularly noteworthy: its operating margin and operating income stand at 13.5% and $5.4 billion, respectively.
Home Depot's management suggests that there's built-up demand for home renovations, which could drive the company's growth when conditions improve. Home Depot CFO Richard McPhail told CNBC recently, "There is demand for remodeling, and they are putting it on hold until they see a more favorable financing environment. And so the demand is there; the question is when it's unlocked."
However, Home Depot is currently facing a challenge. With mortgage rates and home equity loan borrowing costs still high, Home Depot customers tend to be cautious when it comes to spending. If interest rates drop in 2023, it would likely trigger a wave of renovations and home sales (both positive developments for Home Depot), but that day hasn't arrived yet.
The verdict: Invest in Amazon
Amazon's shares currently have a price-to-earnings (P/E) ratio of 43, while Home Depot's is 27. This means Home Depot appears to be the cheaper option right now, but that doesn't mean it's automatically the superior investment choice.
The Federal Reserve has already lowered the federal funds rate twice in recent months, but mortgage rates have actually risen. This is due to mortgage rates not being directly tied to the federal funds rate and also being influenced by bond yields, which have gone up, taking rates along with them.
Even if further rate cuts occur in 2023, it's not guaranteed to address high borrowing costs. Home Depot needs consumers to feel secure spending on large home improvement projects again, and no one can predict when that will happen.
Meanwhile, Amazon is already benefiting from its e-commerce dominance and the expanding demand for AI-driven cloud computing. These factors make Amazon's stock a more appealing choice at the moment.
Given the current market trends and the company's robust performance, investors might consider allocating funds towards Amazon's expanding business in e-commerce and cloud computing, particularly in light of Goldman Sachs' projection that the cloud computing market could reach $2 trillion by 2030 due to the growth of artificial intelligence. Additionally, diversifying a finance portfolio might involve looking into various investment opportunities, such as Amazon's stocks, to maximize returns and mitigate potential risks.
