Can Home Depot Stock Double in 5 Years?

Higher interest rates over the past couple of years, unsurprisingly, have impacted the housing market and any adjacent industries. Home Depot (NYSE: HD) has been negatively affected by this. After posting double-digit revenue growth in fiscal 2020 and fiscal 2021, its gains have been more muted in recent years.

Nonetheless, the retail stock has done pretty well. It's up 86% in the past five years (as of March 27), which lags the broader S&P 500 index. Investors might be eyeing the shares as they trade 16% off their peak from last December.

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But can Home Depot stock double over the next five years? Here's what you need to know about the leader in home improvement.

Macro headwinds

Ongoing economic uncertainty, characterized by higher borrowing costs, pressured consumer confidence, and inflationary pressures discourage consumers from wanting to spend on big purchases. This hurts demand for Home Depot. After same-store sales decreased 3.2% in fiscal 2023, they fell 1.8% in fiscal 2024 (ended Feb. 2). The expectation is for same-store sales to increase 1% in the current year.

According to consensus analyst estimates, Home Depot's revenue is projected to grow 3.8% per year on average over the next three fiscal years. There isn't much to be excited about.

Despite muted expectations, by zooming out, investors will notice a favorable industry layout. One key data point the leadership calls out is the surge in home values in the past few years.

"There's literally trillions of dollars of equity built up in the U.S. housing," CEO Ted Decker said on the Q4 2024 earnings call.

Perhaps when macro conditions loosen, households will look to tap this equity in order to fund renovation activity. This could drive demand for Home Depot.

Positive factors

It's easy to get caught up in the latest financial results, namely that Home Depot's growth has slowed dramatically. However, the business isn't without positive traits that investors should be familiar with.

For starters, Home Depot possesses durable competitive advantages, otherwise known as an economic moat. The company generated $160 billion in revenue in fiscal 2024, indicating its massive scale that certainly leads to operating leverage that smaller rivals simply do not have. This large sales base also gives Home Depot negotiating leverage with suppliers while also providing it with the resources to invest in supply chain improvements and omnichannel capabilities.

The company's brand also has value. In a fragmented industry, consumers have come to trust Home Depot's name because of its wide inventory availability, customer service, and distribution reach.

Another positive trait is the company's financial performance, particularly around profitability. Home Depot's operating margin averaged 14.3% in the past decade, which results in ongoing free cash flow production. A strong bottom line minimizes financial risk.

This also benefits shareholders. Home Depot's management team focuses on returning capital to investors, primarily through dividends. In the past 24 months, the business paid $17.3 billion in dividends. And it has cut a check in 152 straight quarters, a fantastic track record.

Hitting a double

Finding a stock that can double in the next five years, or rise 100%, means that the share price increases at a roughly 15% compound annual rate. This would undoubtedly be a very encouraging outcome for investors.

One critical factor that can impact returns is the starting valuation. To be clear, Home Depot leaves much to be desired in this regard.

As of this writing, shares trade at a price-to-earnings ratio of 24.3. This is slightly more expensive than the trailing five- and 10-year average multiples. However, assuming the P/E ratio is the same in 2030, it implies that Home Depot's diluted earnings per share (EPS) must grow by 15% per year for the stock to double. That seems unlikely, given that EPS rose by half that amount on an annualized basis since fiscal 2019.

Home Depot is a high-quality business with a wide moat and solid profitability. However, I think the probability is low that shares can double in the next five years.

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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.