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We believe that Amazon (NASDAQ: AMZN) is a better pick than its industry peer – Target (NYSE: TGT). AMZN stock trades at a higher multiple of 4x sales, versus almost 1x revenues for TGT. This can be attributed to AMZN’s superior revenue growth, profitability, and financial position. There is more to the comparison, and in the sections below, we discuss why we think AMZN will outperform TGT in the next three years. This analysis compares several factors, such as historical revenue growth, returns, and valuation. Our dashboard Target vs Amazon: Industry Peers: Which Stock Is A Better Bet? has more details on this.

1. AMZN Stock Has Fared Better In The Last Three Years

AMZN stock has shown strong gains of 20% from levels of $165 in early January 2021 to around $199 now, vs. a decline of 15% for TGT stock from levels of $175 in early January 2021 to around $148 now. In comparison, the broader S&P500 has increased about 50% over this roughly 3-year period. However, the increase in these stocks has been far from consistent. Returns for AMZN stock were 2% in 2021, -50% in 2022, and 81% in 2023, while TGT stock saw returns of 31%, -36%, and -4% over these years, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that AMZN stock underperformed S&P in 2021 and 2022 whereas TGT underperformed the S&P in 2022 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AMZN and TGT face a similar situation as they did in 2022 and underperform the S&P over the next 12 months — or will they see a strong jump? While we expect both stocks to trend higher, AMZN will likely fare better than TGT.

2. AMZN Has Seen Better Revenue Growth

Amazon saw its sales rise 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 rate of 4.9% from $93.6 billion to $107.4 billion in 2023 over the same period.

TGT’s revenue has benefited from the shift to e-commerce due to its longtime omnichannel approach. Also, having convenient services for same-day business and purchasing changes brought about by Covid-19 worked well for the company. The retailer invested heavily in same-day fulfillment service, including Order Pickup, Drive Up, and same-day delivery with Shipt, all this while leveraging its brick-and-mortar stores. However, the company saw a shift in consumer sentiment and slowing company sales since the last year. Investors are cheering for the expected revenue return to grow in 2024, as the 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 ad 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 is leveraging its unmatched shopping platform to make money from ads, and it also makes money when the ads lead to product sales. AMZN’s cloud computing segment that commands industry leading market share is a major growth engine for the company, closely followed by business in the North America and International segments.

3. AMZN Is More Profitable

Target’s operating margin of 5.3% in 2023 declined from 7.0% in 2020, while Amazon’s operating margin expanded marginally from 5.9% to 6.4% over this period. Looking at the last twelve-month margin change compared to last 3 years operating margin, Amazon’s 1.7% fares better than -0.4% for Target.

Looking at financial risk, Amazon fares better than Target, with its 0% debt as a percentage of equity being lower than 1.6% for the latter. Moreover, its 16% cash as a percentage of assets is higher than 8% for Target, implying that Amazon has a better debt position and more cash cushion.

4. The Net of It All

We see that Amazon has demonstrated better revenue growth, is more profitable, and has a better financial position. Looking at prospects, we believe AMZN is the better choice of the two, given its attractive valuation. We estimate TGT’s Valuation to be $160 per share, reflecting an 8% upside from its 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 the full year 2024. On the other hand, we estimate AMZN’s Valuation to be $213 per share, reflecting a 7% upside. 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 the full year 2024.

While AMZN may outperform TGT in the next three years, it is helpful to see how Target’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 7/10/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.