Buy Better: Amazon vs. Lowe’s
There is no denying Amazon (NASDAQ: AMZN) is a powerhouse in the field of retail. Digital Commerce 360 estimates that the company controls nearly a quarter of the ecommerce market in the United States, while eMarketer places the figure closer to 40%. Yet the company continues to find ways to grow. Even before the COVID-19 pandemic took hold, Amazon was posting more than 10 straight years of revenue growth, and net profit has absolutely exploded since the organization finally put all the pieces of its puzzle together in 2017. Analysts are calling for revenue growth of 18%. this year, despite the tough competitions created by the surge in online shopping last year.
Choosing a particular stock is a relative matter, however. Its price relative to earnings, business risks, and even changes in public perception of a company are all factors that can affect the price of a stock.
That’s why, out of the two potential purchases right now, the home improvement retailer Lowe’s (NYSE: LOW) is the best choice. While Amazon struggles to keep up after an incredible 2020, Lowe’s begins 2021 with a burst of steam that most investors may still underestimate. Two initiatives in particular should drive its surprisingly strong growth.
New and improved
Lowe’s has never been a “bad company” per se. But it’s usually played in the background to compete Home deposit (NYSE: HD) in terms of size and growth. Lowe’s stock has also consistently lagged Home Depot’s performance over the past 10 years. Investors have no doubt learned to expect the company to be a perpetual runner-up.
A funny thing happened to Lowe’s in 2020, however. Largely led by relatively new CEO Marvin Ellison (yes, the same Ellison who was previously an executive at Home Depot), Lowe’s unveiled a new growth plan in December dubbed Total Home. Like most review strategies, this one is loaded with financial goals. Unlike most growth initiatives, this one actually contains a few clear business ideas that will get the company to its tax finish line.
One of these specific plans is a deeper dive into the professional contractor market.
Right now, only 20-25% of Lowe’s annual revenue, or roughly $ 85 billion, comes from builders, renovators, and craftspeople. The retailer hopes to push this proportion up to 50%.
It’s an ambitious goal, and the company certainly won’t get there overnight. But this is not an unreasonable goal. This is roughly the suggested proportion of Home Depot’s revenue that comes from construction and repair professionals. If Lowe’s is able to add this entrepreneurial activity – which does not detract from its DIY business – the company could see additional revenue growth in the order of $ 35 billion per year.
Besides, this journey has already started. In August, the home improvement retailer announced it would begin offering tool rental service from coast to coast. As Executive Vice President of Stores Joe McFarland noted around the same time, 70% of professional contractors regularly rent tools. This new service attracts professionals to its stores, where they can also purchase products such as lumber, nails and shingles.
The other remarkable detail buried in Lowe’s 79-page slideshow showcasing Total Home is the company’s plan to upgrade its technology infrastructure (and its website in particular) to better serve customers where they live. While he didn’t offer details, expect to see more deliveries from local stores, improvements in supply chain predictive capabilities, and a better in-store employee. Technology tools that facilitate a better shopping experience for customers. The latter two of these three items are collectively expected to make or save the company an additional $ 4 billion.
The deciding factor: Last month, the company budgeted an additional $ 15 billion in share buybacks, on top of the remaining $ 4.7 billion still available from a previous buyback program. As a perspective, Lowe’s current market cap is $ 125 billion.
Investors were made aware of all of these plans last month. As a group, however, investors have yet to come and fully appreciate how great this upcoming redesign is. The stock is still where it was in August. This is the crux of your opportunity.
The best choice at the moment
If you own a stake in Amazon, don’t panic. It’s hardly doomed to fail. The biggest risk in owning it right now is investor reaction to what will look like a downturn this year. But it would still only be a temporary headwind.
However, anyone looking to put some extra cash to work right now may find Lowe’s a much easier name to digest, as well as a more productive choice. The market is looking far beyond the potential of its Total Home initiative, but this error should be corrected for the foreseeable future once investors see the work translated into numbers. This is especially the case in light of the fact that analysts are calling for a slight drop in 2021 results after a rather robust 2020.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.