After years of stellar gains, Home Depot (NYSE: HD) is having a rough 2025. Shares are down nearly 6% year-to-date, underperforming the broader market and disappointing investors who had grown accustomed to consistent outperformance.
At the start of the year, I flagged Home Depot as a company to watch but stopped short of calling it a buy. Instead, I downgraded the stock to a hold, citing clear headwinds facing the home improvement giant this year. Six months later, those challenges have played out, and the stock continues to lag.
So, is now the right time to pick up shares at a discount? Below, I break down Home Depot’s current performance, examine its financials and strategy, revisit its valuation, and share my updated outlook on the stock.
Pandemic Boom Gives Way to a Consumer Shift
Home Depot’s latest earnings report, released May 20, painted a mixed picture. Comparable sales in the first quarter dipped 0.3%, while U.S. comps slipped 0.2%. Adjusted diluted earnings per share came in at $3.56 — modestly below the $3.67 posted a year earlier.
These results mark a stark contrast to the company’s pandemic-era boom. During lockdowns, consumers poured money into home renovations, pushing Home Depot’s sales growth to nearly three times its historical norm. But home improvements tend to be durable investments. Once you remodel a kitchen or repaint the exterior, you don’t need to do it again for years.
In the meantime, consumers have shifted their discretionary spending back to travel, dining out, and entertainment — categories that suffered during the pandemic but have rebounded strongly with the reopening.
Home Depot typically grows revenue at a steady 7–10% clip annually, but growth has slowed significantly since 2022. Management remains upbeat about the spring selling season — traditionally the strongest for home improvement — yet they are guiding for just ~1% comparable sales growth in fiscal 2025. Earnings per share are expected to decline about 3% to $14.91.
Financials Remain Solid, But Signs of Strain Appear
Home Depot’s recent quarterly data shows the company is still a retail powerhouse — but not without cracks in the foundation.
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Customer traffic rose 2.1% to 395 million transactions in Q1.
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Average ticket was virtually flat year-over-year at $90.71 despite inflation running near 3%. That suggests customers are buying fewer items and prioritizing essential purchases.
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Inventory jumped to $25.76 billion, up significantly from a year ago. Management appears to be front-loading inventory to mitigate the risk of rising tariffs later this year.
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Long-term debt edged down slightly to $47.3 billion, from $48.5 billion in the year-ago quarter.
Home Depot also announced another acquisition aimed at strengthening its professional customer segment — an area where it has long held an advantage over rival Lowe’s, which caters more to DIY consumers.
Valuation: Not Quite a Bargain Yet
Even after this year’s pullback, Home Depot stock doesn’t scream cheap. My updated discounted cash flow analysis, based on projected long-term free cash flows, yields an intrinsic value of $330 per share. With the stock currently trading around $366, it remains slightly overvalued, in my view.
The forward price-to-earnings ratio sits near 24x — still at the higher end of its historical range despite weaker sales growth and lower margins.
Long-term investors may take comfort in Home Depot’s impressive track record of generating high returns on invested capital (ROIC). During the pandemic, ROIC soared above 30%; today, it’s closer to 25% — still excellent given the company’s estimated cost of capital around 10%. But the trend is downward.
Home Depot (HD) — Bull & Bear Scenario Analysis
Bull Case: Resilience and Rebound
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Market Leadership: Home Depot’s strong brand and professional contractor focus maintain its competitive edge.
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Return to Growth: Post-pandemic normalization leads to modest recovery in comps and ticket size as consumer spending stabilizes.
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Tariff & Inventory Management: Efficient supply chain and tariff mitigation strategies limit margin erosion.
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Valuation Appeal: Stock dips below $300 create a compelling entry point with upside potential.
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Long-Term Opportunity: The $1 trillion U.S. home improvement market provides durable growth tailwinds.
Bull Case Outcome:
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Comparable sales return to 3–5% growth within 1–2 years.
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ROIC stabilizes near 25%.
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Stock appreciates 15–25% from current levels over the medium term
Bear Case: Prolonged Challenges
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Weak Consumer Demand: Shift away from home improvement spending persists, with discretionary dollars favoring experiences.
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Margin Pressure: Tariffs, inflation, and inventory build-up continue to weigh on profitability.
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Valuation Compression: Sales growth disappointments keep valuation stretched, leading to multiple contraction.
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Competitive Threats: E-commerce and rival Lowe’s gains pressure Home Depot’s market share.
Bear Case Outcome:
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Comparable sales stagnate or decline further over 2025–2026.
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ROIC declines toward pre-pandemic levels (~15–20%).
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Stock price falls below $280, underperforming the broader market.
The Long-Term Story Is Intact — But Patience Is Key
The U.S. home improvement market remains an attractive $1 trillion opportunity, and Home Depot’s competitive position is secure. Its focus on heavy, bulky, and immediate-need products has insulated it from online competition in a way many other retailers can only envy.
But in the short term, the stock appears priced for better times. I’d rather see a greater margin of safety before initiating a position. My preferred entry point would be below $300 — ideally in the $290–$300 range.
Home Depot Valuation Sensitivity Table
Assumptions:
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Bull Case: Earnings rebound moderately; valuation expands as growth and margins improve.
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Base Case: Earnings decline modestly as forecast; valuation remains steady near long-term average.
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Bear Case: Earnings fall further due to ongoing headwinds; multiple contracts amid uncertainty.
Key Takeaways for Investors
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Home Depot stock is down ~6% YTD as pandemic-era tailwinds fade.
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Q1 earnings and comps declined slightly; full-year guidance points to further weakness.
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Consumers are prioritizing experiences over home improvements.
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Inventory and tariff risk are worth watching in the months ahead.
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The stock remains modestly overvalued at ~$366 versus my $330 fair value estimate.
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ROIC is still strong but trending lower post-pandemic.
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The long-term growth story is intact — but better prices may come.
Bottom Line: HOLD — with a watchful eye on valuation and market signals
Rationale:
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Resilient business model and leadership position in a large, stable market underpin long-term potential.
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Short-term challenges — consumer spending shifts, tariff risks, and margin pressure — justify a cautious stance.
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Valuation remains above my intrinsic estimate, suggesting limited upside from current levels near $366.
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Preferred entry price would be below $300, offering a more attractive risk/reward balance.
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Investors currently holding HD should maintain their positions but prepare for possible volatility.
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New investors should wait for clearer signs of earnings stabilization or a pullback to better entry levels.
Home Depot remains one of the best-run retailers in America, with a long runway of opportunity and competitive advantages that have stood the test of time. But even great businesses can be poor investments at the wrong price.
For now, I’m sticking with a hold rating on Home Depot. Investors looking to initiate a position should exercise patience and wait for a more attractive valuation. For long-term holders, there’s no need to panic — but temper expectations as the company works through a tougher retail environment in 2025.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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