In the tempestuous arena of the stock market, Target’s stock (TGT) has shown unparalleled resilience, humming the tune What goes down, must come up, rather than following the Newtonian law of gravity. Contrary to market trends, Target’s stock flourished when the market fizzled, making it a point of interest for investors who are now deliberating whether it would be a prudent decision to buy or if this is a case of Fear of Missing Out (FOMO).
In March 2020, when the pandemic caused economic uncertainties and volatility, most stocks took a nosedive. However, Target’s stock proved to be an anomaly, shining brightly amidst the darkness, thus prompting a closer examination into why and how the company managed to achieve this phenomenal feat.
The primary driver behind the extraordinary resilience shown by Target’s stock was its strategic business model. The company embraced the phygital model, a balanced blend of physical and digital marketplaces. This approach extensively expanded its customer reach, influencing not only the traditional shoppers who frequent the physical stores but also digital consumers who prefer online shopping. Nearly $10 billion of Target’s $15 billion year-over-year (YoY) sales growth was through its digital channels, underscoring the significance of this strategy.
Beyond its digital transformation, Target also showed an increased commitment to enhancing the consumer experience. The company made considerable investments in supply chain capabilities, introduced a same-day delivery service called Shipt, and launched a pick-up service designed to provide customers with a convenient shopping experience. These initiatives provided Target with an edge in the heavily competitive retail market.
The result of Target’s strategic initiatives was a profitable outcome, with the company seeing its highest ever market capitalization at more than $100 billion in December 2020. It helped Target’s stock price to flourish when most others suffered.
On the financial front, Target’s robust performance was evident in its third-quarter results where it posted an admirable 21.3% boost in YoY sales. This increase was mainly driven by a 155% YoY rise in digital sales and a 10% growth in same-store sales. From an earnings standpoint, adjusted Earnings Per Share (EPS) stood out at $2.79, significantly better than $1.36 in the previous year’s corresponding quarter.
Despite Target’s apparent success, the question arises, whether Target’s stock is a prudent buy now or just another case of FOMO. This question is underpinned by Target’s Price to Earnings (P/E) ratio, which soared to 23.4x in January 2021 from 18x in February 2020. The inflated P/E ratio points towards a potentially overvalued stock, and investors must tread cautiously. An overvalued stock could see a price correction that may lop off the earnings of investors who buy-in high.
Nonetheless, considering the strategic initiatives, and more importantly, the successful implementation of the same, Target appears to have fundamentally strong drivers behind its growth. The company’s focus on seamless omnichannel experience, investment in improving supply chain capabilities, and contribution to enhancing customer experience gives it a robust foundation for growth.
As final thoughts, while gravity defying rise of Target’s stock beckons a lot of attention and enthusiasm among the investors, one must not disregard the potential risk tethered to the high P/E ratio. A balanced blend of market sentiment, historical stock performance, the company’s strategic initiatives, and its financial results, should guide investors to make an informed decision. It might be more prudent to follow fundamentals rather than succumbing to FOMO. As always, discretion is advised in the unpredictable arena of the stock market.