Shopify deal and increased investments drive Target stock higher

Some investors have shied away from consumer staples stocks as U.S. consumers struggle with inflationary pressures and an uncertain timeline for whether the Federal Reserve will actually cut interest rates this year. Adding to the bearish outlook, U.S. consumer confidence has fallen over the past month.

$146.74

-0.43 (-0.29%)

(As of June 27, 2024)

52 week range

$102.93

▼

$181.86

Dividend Yield

3.00%

P/E Ratio

16.47

target price

$177.61

As the economy becomes more uncertain, investors may want to put a few items at the top of their filtering process when searching for their next investment. One of those filters should be healthy and stable free cash flow (operating cash flow minus capital expenditures), as this metric typically gives a company the ability to weather most economic crises.

of stocks Target Corporation New York Stock Exchange: TGT The company’s stock price has underperformed the S&P 500 Index by more than 15% over the past 12 months. This share price volatility is primarily due to investor concerns over the company’s free cash flow over the past few years, which has remained volatile. However, management has plans to raise more investor capital, and the next step in that strategy has now been revealed.

Target Investments: Catalyst for Stock Rise

Over the past five years, Target’s financials show the company has generated about $4.8 billion in free cash flow on average. That all changed when the COVID-19 pandemic began, and management realized they needed to go down a new path to capture more market share than they had before the pandemic.

Capital expenditures doubled from $2.5 billion in 2018 to $5.5 billion by 2023. These heavy investments have significantly reduced Target’s return on invested capital (ROIC), which once hovered around 12%. Currently, Target’s ROIC rate is at 8%, which is not necessarily a bad thing.

Target has invested in redesigning its stores and distribution centers to improve its logistics processes and customer service. In addition, nearly all Target stores are Alta Beauty Co., Ltd. Nasdaq: ULTA and Starbucks Corporation Nasdaq: SBUX It will be installed in Target stores.

These investments improve Target’s in-person experience, which is a good thing, but today’s consumer economy is increasingly digital, so Target also needs to grow its online presence, which is where the new partnership came from. Shopify Inc. NYSE: Shop Come in.

Until these new investments are in place and Target’s ROIC recovers to and potentially exceeds pre-COVID levels, exposure to the scale that Shopify can offer could ease investors’ positioning.

What Wall Street thinks about Target’s latest strategy

Analysts at Jefferies Financial Group maintained their valuation of Target at $205 per share and expect the stock to rise 40.7% from its current trading price, but these targets were set in the last quarter, so here are the latest valuations from June.

Evercore officials believe Target is worth $166 a share, about 14% above today’s price. What’s more, Wall Street is projecting earnings per share (EPS) of up to 12.8% over the next 12 months, which may be a conservative estimate.

Why? It’s still hard to predict how this new Shopify partnership will impact Target’s financials. Still, investors can imagine how it will affect margins and revenue growth. Another way to predict this future partnership is to look at Shopify’s financial results.

Shopify stock indicators point to value of this deal

Wall Street expects Shopify to grow EPS by 32.8% this year, which is a more accurate reflection of the company’s future now that it’s about to partner with one of America’s most popular retailers.

Here’s what investors should be happy about: Citigroup analysts raised their target price for Shopify stock to $96 per share, forecasting upside of up to 46.2% from the current stock price. Even more notable, the price increase comes just one day after Target announced its partnership with Shopify.

Gauging other market sentiment towards Shopify stock can help investors get another perspective on the Target partnership: In terms of price-to-book (P/B) multiple, Shopify is valued at 9.3x, a 43.1% premium over the Computer sector’s average valuation of 6.5x.

Another valuation metric, the price-to-sales multiple (P/S), proves Shopify is a great company in the Packaged Software industry. Shopify is valued at 11.9x, 47% higher than the industry average of 8.1x.

There’s usually a good reason why stocks trade at such a premium, and investors now have a way to find out what that reason is. Shopify is getting all the attention, so it’s easy to focus on it. Yet the hidden value in this deal is actually Target.

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