This leading retailer has produced fantastic returns over the past few decades.
Home Depot (HD 1.16%) has made for a phenomenal investment historically. Since their initial public offering in 1981, the shares have generated a monster total return of 2,973,000%. This means a $10,000 investment would be worth just under $300 million today.
But what does the future hold for this top retail stock that trades 13% off its peak price? Can Home Depot, which is valued at $353 billion today, reach a trillion-dollar market capitalization by 2030?
Facing a slowdown
Home Depot just reported financial results for its fiscal 2024 second quarter (ended July 28). The business reported a 0.6% revenue increase, but same-stores sales dipped 3.3%. Management downgraded the full-year outlook, now forecasting that comparable sales will fall 3% to 4%, from previous guidance of a 1% drop.
This weakness isn’t surprising, especially when you put yourself in the shoes of the customer. If a more accommodative macro backdrop is in the cards in the near future, it’s probably best to wait before making a big purchase or taking on a major renovation project.
But Home Depot’s recent challenges point to a key risk about the business, which is that it’s somewhat cyclical. Inflationary pressures and the direction of interest rates can have an impact on financial performance.
That being said, investors shouldn’t worry about this company from a financial perspective. Home Depot has manageable debt levels, and it’s consistently profitable to the point that it’s able to return billions in cash each year to its shareholders in the form of dividends and buybacks.
Industry conditions
Home Depot is a high-quality company because it possesses an economic moat. With its network of over 2,000 stores in the U.S., there is no brand more well-known in the home improvement industry. This can resonate with both DIY and pro customers.
With a trailing-12-month sales base of $152 billion, Home Depot also has unrivaled scale. This should give it tremendous negotiating leverage with its suppliers, while also helping generate healthy profits.
Despite its latest challenges, Home Depot is positioned well to succeed over the long term. The leadership team wholeheartedly agrees, as it called out three major trends that should work in the company’s favor. There is not only a housing inventory crunch in this country, but the median age of a home in the U.S. of 40 years has steadily climbed higher. Additionally, the fact that homes have appreciated so much in value in the past few years gives consumers valuable equity to tap into to tackle upgrades. This all supports demand for Home Depot.
Path to $1 trillion
As of this writing, there are only seven companies in the trillion-dollar club. For Home Depot to enter this exclusive category would be an amazing achievement that would further solidify the business as one of the most successful of all time. Shareholders would want nothing more.
For Home Depot to reach $1 trillion in six years, its market cap needs to expand by 183%, which would translate to a yearly gain of 19% (not including the potential impact of share buybacks). In the past six years, the market cap increased by 62%.
To be clear, I think Home Depot is a quality enterprise with competitive strengths, growth potential, and a solid financial position. But I don’t think it’s going to get to the $1 trillion club by the end of the decade. Assuming the current price-to-sales multiple of 2.4 holds true in 2030, the company’s revenue would need to rise by that same 19% annually in the next six years, something I’m confident won’t happen.
Investors are more likely to see this milestone reached in the following decade.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.
