clock menu more-arrow no yes

Home Depot’s stock is flying high. Is it a good time to buy a startup like Houzz?

Sometimes big acquisitions come from a position of strength.

Houzz.com

Big retailers sometimes make big acquisitions from a position of weakness. Exhibit A: Walmart’s intention to spend $3.3 billion to buy one-year-old Jet.com to jump-start a decelerating e-commerce business.

Other times, big deals are easier to get done from a position of strength. A potential Exhibit B: Home Depot, which is riding high thanks to a years-long housing boom. Here’s its five-year stock chart, which is a beauty:

If Home Depot were interested in using some of its valuable stock in an M&A deal, an interesting target could be the home design startup Houzz. Started and run by a husband-and-wife duo, Houzz essentially began as a version of Pinterest, but exclusively for images of homes.

Homeowners use the service to browse photos for ideas for home designs and renovations. They can also look up contractors and architects in their area and shop for furniture and decor directly from the website or app. The startup makes money through a mix of advertising, promoted listings from vendors, and its furniture and decor shop.

For Home Depot, Houzz would represent a bet on homeowners’ increasing use of the internet for inspiration on home makeovers. In the first quarter of this year, about 6 percent of Home Depot’s sales came from online orders.

This deal, though, would probably not come cheap.

The startup, backed by venture capital firms Sequoia and GGV Capital, last raised money from investors in 2014 at a valuation north of $2 billion. Unless the startup hits a wall soon, an acquisition offer would likely have to hit well north of that.

Home Depot certainly could afford a deal of, say, $3.5 billion, which would represent just around 2 percent of its market cap. The home improvement retailer had $3 billion in cash at the end of Q1 and its stock is very valuable.

In the wake of Walmart’s agreement to purchase Jet and Unilever’s $1 billion acquisition of Dollar Shave Club, traditional players are waking up to the fact that digital businesses are transforming how people get inspired and make purchases.

If Home Depot wanted to make a big digital bet, it would be doing so from an already solid position.

This article originally appeared on Recode.net.

Sign up for the newsletter Sign up for The Weeds

Get our essential policy newsletter delivered Fridays.