Amazon.com, Inc. (AMZN) and Walmart, Inc. (WMT) are two biggest names in the US retail space. While AMZN has made its name establishing itself as the biggest e-commerce platform in the world, WMT has been dominating the physical retail channels for generations now. In fact, WMT has retained the title of the world’s largest retailer in terms of revenue for the past six years.
WMT is currently expanding into the e-commerce space via a new subscription plan it has launched dubbed Walmart+. AMZN, conversely, is focused on developing its cloud services arm currently, after dominating the online retail industry in recent years.
Both the companies have generated significant returns over the past five years. While AMZN gained 371.5% over this period, WMT returned 144.8%. In terms of year-to-date performance, AMZN is the clear winner with 70.9% gains versus WMT’s 24.6%. However, AMZN has declined 4.2% over the past three months owing to the coronavirus vaccine development news and an antitrust lawsuit, while WMT gained 3.7%.
But which stock is a better buy now? Let’s find out.
Latest Developments
AMZN recently opened fulfilment centers in Missouri, Mississippi, North Dakota, Nebraska, Texas, Oklahoma, and Kansas, consolidating its supply chain in the United States. This move is expected to improve AMZN’s reach to the remote parts of the country, accounting for higher demand and revenues.
The company also recently launched Amazon Pharmacy for online prescription medication sales. The online drug sales through the e-commerce platform reaps several savings benefits, with up to 80% savings on non-prescription medication.
To exploit rising demand for cloud services, AMZN announced the construction of a second infrastructure region in India, Australia, and Switzerland. Expected to be operational by 2022, the initiative boost Amazon Web Services (AWS) operations across Asia Australia and Europe, as cloud services gain more traction there as part of a growing remote working culture.
Multiple companies such as Siemens Smart Infrastructure, Mercado libre, Zalando, and Latin America’s largest bank, Itaú Unibanco, have selected AWS as their preferred cloud network provider. AMZN also launched AWS Glue DataBrew, which facilitates visual data preparation without writing code. Simplifying data storage and processing, AWS Glue DataBrew is likely to attract a strong client interest due to its user-friendly nature.
On October 29th, AWS announced general availability of Nitro Enclaves and Network Firewall, allowing users to securely process extremely sensitive data. Its high encryption and security measures are likely to appeal to a wider demographic, thereby boosting AMZN’s revenues from its cloud computing segment.
WMT launched Walmart Pet Care on November 12th, which provides Pet insurance in collaboration with Petplan. The comprehensive Pet Care plan supports Rover, a pet sitting and dog walking app, and Walmart PetRx, an in-store and online pharmacy services. As 98% of the pets in the United States are uninsured, WMT’s unique initiative is expected to be a big hit among the masses because pet adoption rates rise during the pandemic.
WMT is currently exploring an IPO of its Indian e-commerce subsidiary Flipkart, which is projected to be valued at $40 billion. If WMT follows through on the offering, the company would be divesting of up to 25% of its interests. WMT recently launched Walmart+, a subscription membership culminating delivery offering, scan and go, online shopping and fuel discounts integrated in one platform. This subscription service is relatively cheaper than Amazon Prime, giving WMT an edge.
WMT recently removed the $35 shipping minimum order requirement for WMT+ members this holiday season, beginning December 4th. This should bolster WMT’s sales significantly because it is the first retail chain to offer one- and two-day deliveries for products without any minimum order value.
On September 20th, WMT and Oracle received temporary regulatory approval to acquire 20% of ByteDance, the parent company of TikTok. The United States is the leading market based on TikTok iOS revenue, with approximately $50.40 million in user spending as of February 2020. TikTok’s seemingly large user base in the country should help WMT multiply its revenues through this investment.
Recent Financial Results
AMZN’s net sales increased 37% year-over-year to $96.10 billion in the third quarter ended September 2020. Net income grew 200% from the year-ago value to $6.30 billion, while EPS rose 192.4% from the same period last year to $12.37.
WMT’s total revenue (excluding currency) increased 6.1% year-over-year to $134.70 billion for the fiscal third quarter ended October 2020. This can be attributed to a 6.4% increase in US competitive sales and a 74% rise in US e-commerce sales. The company’s operating income rose 22.5% versus the same period last year to $5.80 billion, while EPS increased 56.5% from the prior year-quarter to $1.80.
Past and Expected Financial Performance
AMZN’s revenue and EPS has increased at CAGRs of 29.3% and 105.8%, respectively, over the past three years. On the other hand, WMT’s revenue and EPS rose at CAGRs of 3.5% and 22.5%, respectively, over the same period. AMZN’s net income increased at a CAGR of 108.2% over the past three years, while WMT’s net income grew at a CAGR of 19.9% over the same period.
AMZN’s EPS is expected to increase 51.5% in the current year, 30.1% next year, and at a rate of 36.4% per annum over the next five years. Analysts expect revenue to increase 35.4% in the current year, and 18.3% next year.
In comparison, WMT’s EPS is expected to increase 13.2% in the current year, 3.2% next year, and at a rate of 6.8% per annum over the next five years. The consensus revenue estimates indicate 5.9% growth in the current year, and a slight increase next year.
Both companies have impressive earnings surprise histories, as they beat the street EPS estimates in three out of trailing four quarters.
Profitability
WMT’s trailing 12-month revenue is 1.58 times AMZN’s. However, AMZN is more profitable, with a gross margin of 40.2% compared to WMT’s 24.8%.
WMT’s return on total capital and return on assets of 10.6% and 6.7%, respectively, compare favorably with AMZN’s 8% and 5.2%, respectively.
Valuation
In terms of forward P/E, AMZN is currently trading at 91.01x, 76.7% more expensive than WMT, which is currently trading at 21.19x. AMZN is also more expensive in terms of Non-GAAP trailing 12-month PEG (1.79x versus 0.55x) and trailing 12-month Price/Sales (4.53x versus 0.76x).
AMZN’s trailing 12-month Price/Cash Flow of 28.66x is 56.5% more expensive than WMT’s 12.47x.
Thus, WMT is the more affordable stock here.
POWR Ratings
WMT is rated “Strong Buy” in our proprietary POWR Ratings system, while AMZN is rated “Buy.” Here are how the four components of overall POWR Rating are graded for both these stocks:
WMT has an “A” for Trade Grade, Buy & Hold Grade and Industry Rank, and “B” for Peer Grade. It is currently ranked #1 out of 18 stocks in the Grocery/ Big Box Retailers industry.
AMZN has an “A” for Industry Rank, “B” for Trade Grade and Buy & Hold Grade, and “C” for Peer Grade. In the 59-stock Internet group, AMZN is currently ranked #18.
The Winner
The biggest e-commerce platform AMZN is currently battling antitrust allegations made by the United States and European Union for alleged monopolistic practices. The company currently faces the threat of being divided to restrict its growth. Also, positive developments on the coronavirus vaccine front have led to a massive sell-off in the stock as investors shifted focus in anticipation of outdoor-oriented companies rebounding from the pandemic.
WMT, on the other hand, has a well-established retail supply chain, which has been operational throughout the year, even amid the pandemic. The company developed its e-commerce channel significantly by launching Walmart + earlier this year, which is a huge success. With aggressive discounting policies adopted during this holiday season and probable IPOs, WMT is likely to grow significantly over the next couple of months. Thus, WMT is the better pick here.
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AMZN shares were trading at $3,177.29 per share on Tuesday afternoon, up $19.29 (+0.61%). Year-to-date, AMZN has gained 71.95%, versus a 16.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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