Better Buy for 2022: Amazon vs. Target

A general merchandise retailer Target Corporation (TGT), has roughly 1,909 stores across the United States and operates 44 distribution centers. It sells its products through its stores and digital channels. On the other hand, e-commerce giant Amazon.com, Inc. (AMZN) engages in the retail sale of consumer products and subscriptions internationally. It operates through North America; International; and Amazon Web Services.

According to the Commerce Department report, Retail sales declined 1.9% in December, marking the steepest drop in 10 months due to surging prices and an acceleration in COVID-19 infections. However, overall 2021 retail sales were up 16.9% as many retail companies' solid online presence benefited them from online buying trends over the past year. Moreover, the increasing physical store sales with the reopening of the economy should help retailers thrive in the upcoming months. According to a Research and Markets report, the global retail market is expected to grow at a CAGR of 7.7% by 2025. Therefore, both TGT and AMZN should benefit.

TGT has gained 11.8% over the past year, while AMZN has returned 3.7%. Also, TGT’s 7.6% gains over the past nine months compared with AMZN’s negative returns.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On January 13, 2021, TGT’s board of directors declared a quarterly dividend of 90 cents per common share. The dividend is payable March 10, 2022, to shareholders of record at the close of business on February 16, 2022. The 1st quarter dividend will be the company's 218th consecutive dividend paid since October 1967, when the company became publicly held.

On December 2, 2021, Amazon Web Services, Inc., an AMZN company, announced AWS Cloud WAN, a managed broad area network service that makes it faster and easier for enterprises to build, manage, and monitor a unified global network that seamlessly connects cloud and on-premises environments. This could lead to increasing demand for its solution.

Recent Financial Results

TGT’s total revenue increased 13.3% year-over-year to $25.70 billion for the fiscal third quarter ended October 30, 2021. The company’s net earnings grew 46.8% year-over-year to $1.49 billion. Also, its adjusted EPS came in at $3.03, up 8.7% year-over-year.

AMZN’s net sales increased 15% year-over-year to $110.81 billion for the third quarter ended September 30, 2021. However, its net income declined 50.2% year-over-year to $3.15 billion. Also, its EPS came in at $6.12, down 50.5% year-over-year.

Past and Expected Financial Performance

TGT’s revenue and EPS grew at CAGRs of 11.1% and 31.4%, respectively, over the past three years. Analysts expect TGT’s revenue to increase 11.2% in the current quarter and 13.8% in the current year. The company’s EPS is expected to grow 7.5% in the current quarter and 40.8% in the current year. Moreover, its EPS is expected to grow at a rate of 14% per annum over the next five years.

On the other hand, AMZN’s revenue and EPS grew at CAGRs of 27.5% and 42%, respectively, over the past three years. The company’s revenue is expected to increase 9.7% for the quarter ended December 31, 2021, and 21.8% in fiscal 2021. However, its EPS is expected to decline 73.5% for the quarter ended December 31, 2021, and 2.1% in fiscal 2021. AMZN’s EPS is expected to grow at a rate of 36% per annum over the next five years.

Profitability

AMZN’s trailing-12-month revenue is 4.43 times what TGT generates. However, TGT is more profitable with an EBIT margin and net income margin of 8.30% and 6.56% compared to AMZN’s 6.18% and 5.73%, respectively.

Furthermore, TGT’s ROE, ROA, and ROTC of 50.01%, 10.20%, and 18.60% are higher than AMZN’s 25.83%, 5.32%, and 8.10%, respectively.

Valuation

In terms of forward non-GAAP P/E, AMZN is currently trading at 78.23x, 368.2% higher than TGT’s 16.71x. Moreover, AMZN’s forward EV/EBITDA ratio of 24.54x is 139.2% higher than TGT’s 10.26x.

So, TGT is relatively affordable here.

POWR Ratings

TGT has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, AMZN has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

TGT has a C grade for Growth, consistent with analysts’ expectations that its EPS will increase in the upcoming months. On the other hand, AMZN has a D grade for Growth, in sync with analysts’ expectations that its EPS will decline in the near term.

Also, TGT has a B grade for Value, consistent with its forward EV/S of 1.09x, 20% lower than the industry average of 1.36x. However, AMZN has a D grade for Value, consistent with its forward EV/S of 3.62x, 166.2% higher than the industry average of 1.36x.

Of the 39 stocks in the A-rated Grocery/Big Box Retailers industry, TGT is ranked #13. However, AMZN is ranked #32 of 77 stocks in the F-rated Internet industry.

Beyond what I’ve stated above, we have also rated the stocks for Sentiment, Stability, Quality, and Momentum. Click here to view all the TGT ratings. Also, get all the AMZN ratings here.

The Winner

The retail industry is expected to grow significantly with the rapid shift to online platforms amid rising consumer spending. While both TGT and AMZN are expected to benefit, it is better to bet on TGT now because of its robust financials, lower valuation, higher profitability, and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Grocery/Big Box Retailers industry here. Also, click here to access all the top-rated stocks in the Internet industry.

AMZN shares were trading at $3,156.47 per share on Tuesday afternoon, down $86.29 (-2.66%). Year-to-date, AMZN has declined -5.33%, versus a -3.88% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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