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Amazon (NASDAQ: AMZN) and Walmart (NYSE: WMT) continue their battle for retail supremacy in the United States and other parts of the world. The emergence of Amazon once caused investors to fear that it might dominate the retail scene. Amid that worry, Walmart has found a way to drive growth through a combined online and in-store presence – but those improvements may not translate into gains for investors. Let’s take a closer look to find out why.
Walmart returns
In the middle of the last decade, the rise of Amazon amid stagnant Walmart sales left the company in shock. However, Walmart has started its turnaround when Doug McMillon became its CEO in 2014. Buying from jet.com and other e-merchants has taken Walmart online for good, which has given the company a competitive advantage through a combined in-store and online shopping experience.
With this offer, customers could shop online whenever they wanted, and if what they wanted was available in store, they could pick up the items rather than wait for deliveries. With over 90% of Americans living within 10 miles of a Walmart, the company was in a unique position to do this job.
Image source: Getty Images
These improvements continue to drive growth. In the last fiscal year, revenues increased nearly 7% from last year’s levels to approximately $ 559.2 billion. This includes a 79% increase in e-commerce-based comparable sales in the United States over the same period, although the company has not released actual dollar figures for those sales.
These gains helped operating profit rise nearly 10% to about $ 22.5 billion. Unfortunately, Walmart’s tax burden increased by almost $ 2 billion during the year. The company suffered a tax that reduced net income by more than 9% to about $ 13.5 billion. In addition, Walmart’s pre-tax income rose just over 2%, with other earnings rising from just under $ 2 billion to around $ 210 million during the year. The sale of Walmart Argentina explains most of the tax increase and the reduction in other earnings.
The overall growth figures may have left some investors indifferent to Walmart. After the P / E ratio hit 60 in 2019, it fell back to 20, slightly above its multiple in the middle of the last decade.
Why Amazon could still hold the advantage
In contrast, Amazon shows no sign of stagnation. He continues to demonstrate the bulk of his growth through his core competency of online retailing. Total net product sales increased 37% from a year ago to just under $ 341 billion.
Nonetheless, Walmart remains ahead of operating margins. Amazon’s $ 9.4 billion operating profit from product sales was below Walmart’s $ 22.5 billion.
Yet Amazon has a trump card in its cloud computing business, Amazon Web Services (AWS). AWS generates significantly higher margins and profits than its retail arm. Despite net sales of approximately $ 45.4 billion, AWS achieved operating income of $ 13.5 billion.
This gives Amazon a huge competitive advantage. On the one hand, few retailers have skills that can be transferred into a viable cloud computing business. More importantly, AWS is making Amazon less reliant on retail, a business with traditionally slim margins. Therefore, AWS can subsidize retail, which allows Amazon to gain a competitive advantage over Walmart and other peers.
Thanks in large part to this advantage, Amazon generated nearly $ 386.1 billion in overall net sales in fiscal 2020, a 38% year-over-year increase. That helped net income to rise 84% over the same period to $ 21.3 billion, or $ 41.83 per diluted share. Much of that increase came from the “other income” category, which has grown more than tenfold in the previous 12 months to over $ 2.3 billion. Changes in the valuation of stocks and foreign currencies led to the increase in other income.
Such growth continues to keep Amazon’s valuation at a higher level. Its P / E ratio now sits just below 80, which seems to make Amazon stock so expensive in the minds of some investors. While this still greatly exceeds Walmart’s multiples, Target and Costco, the P / E ratio has declined from last fall levels when it often exceeded 120.
Amazon or Walmart?
In the retail arena, Amazon and Walmart have spurred growth by combining online and in-store retailing. However, Amazon records four times the overall revenue growth like Walmart. Additionally, despite all the rewards for Walmart’s e-commerce growth, the company remains reluctant to release specific revenue figures for this segment, which suggests e-commerce still only accounts for a relatively small share of its revenue. .
Additionally, Amazon has found success with the separate company AWS, the success of which allows the company to pay for improvements that make its retail operation more competitive. This helps make Amazon a safer retail stock for investors, even considering its much higher valuation.
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