Target Stock Looks Cheap but It May Be a Bargain Today for a Much Better Reason

Yahoo

27-05-2025

Target's stock has dropped to cheap levels because of slumping sales and worries over higher costs.
Investors could be under-appreciating this one opportunity that's already boosting profits for Target's top peers in the retail space.
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The words "cheap" and "bargain" might look like synonyms. But as I'm using them, the difference has everything to do with the future. Well-know retailer Target (NYSE: TGT) trades at just 11 times its earnings, which is about 60% cheaper than the S&P 500, which trades at about 28 times earnings, according to YCharts. But it's not a good idea to invest in a stock simply because it looks cheap. If Target's profits drop further, this cheap stock likely isn't a bargain.
In other words, Target stock is "cheap" when compared to the valuation of the S&P 500, meaning it's merely less expensive right now. By contrast, the term "bargain" causes me to consider the quality of the business, not just the price. But it's precisely the quality of Target's business that's in question right now.
Consider that Target's revenue peaked about two years ago, and management expects another low-single-digit decline here in 2025. Moreover, its earnings per share (EPS) peaked three years ago. And this year, management is guiding for EPS of $8 to $10, which is a wide range, reflecting a lot of uncertainty with the business.
The situation is complicated yet my assertion is simple: If Target materially grows its earnings in coming years, then the current price is a bargain. Consider that it looks cheap today based on the currently suppressed earnings. Therefore, things would get quite interesting if earnings went up from here. And believe it or not, Target has low-hanging fruit to increase profitability and most investors don't even know about it.
The largest brick-and-mortar retail chain in the world is Walmart (NYSE: WMT) -- everyone knows that it sells physical products in physical stores. What investors might not know is that Walmart has a growing digital business that's boosting its profitability.
Walmart's digital business has multiple components. It has an e-commerce website, which enables high-margin third-party sales in addition to first-party sales. It sells memberships to its subscription product Walmart+. And it leverages this digital scale into a skyrocketing advertising business.
In the first quarter of its fiscal 2026, for example, revenue for Walmart's advertising business jumped 50% year over year.
According to CFO John Rainey, about 25% of Walmart's profits right now come from its memberships and its advertising business. Keep in mind that this digital push for the company is relatively recent. To already constitute one-quarter of profits after just a few years is huge.
This is the playbook that massive brick-and-mortar businesses are using right now to boost profitability. Walmart is a good example. But businesses such as Costco and Kroger are doing it too.
Target is later to the digital game but it's low-hanging fruit to boost profitability. Its subscription service Target Circle 360 launched about one year ago and is helping boost the digital business. In the first quarter of 2025, comparable sales in its stores were down about 6% year over year whereas its digital comparable sales were up about 5%.
The digital business is one of the few things growing for Target, and it has multiple avenues for this. First, it has a retail media business called Roundel. This is a way for Target to take its data and partner with brands to deliver personalized advertising.
Second, it has Target Plus, which allows third-party merchants to sell on Target's e-commerce platform. Again, this is no different from what Walmart or even Amazon does. So it's not a revolutionary idea. But it's an idea that's proven to boost revenue and profits.
Unfortunately, Target's digital efforts are so young that its shareholders don't have perfect visibility into these numbers right now. But the little that can be known is promising.
Target's first-quarter advertising revenue was up 25% year over year to $163 million. Compared to overall Q1 net sales of $24 billion, that's still small. But it has to start somewhere. Moreover, management says that both Roundel and Target Plus enjoyed "double-digit growth" in Q1. That could mean 10% or it could mean 99% -- investors can't be sure. But either way, double-digit growth is encouraging.
To be clear, Target is facing headwinds when it comes to sales. And it's grappling with potentially higher expenses in light of new import tariffs. So there are things that can drag its profits down further.
That said, other prominent retailers have succeeded by investing in digital growth. Target is now investing in digital growth and experiencing a measure of success. Therefore, it's not far-fetched to believe it can boost its earnings in this way. And if it does, the stock is an absolute bargain worth buying today.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, Target, and Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.
Target Stock Looks Cheap but It May Be a Bargain Today for a Much Better Reason was originally published by The Motley Fool