Why Amazon's Valuation Can Never Be Matched By Wal-Mart Or Alibaba

  • Why is Amazon valued much higher than Alibaba (higher transaction value) or Wal-Mart (higher revenues)?
  • What are the upsides that justify that type of high valuation?
  • More importantly, does it have a long-term sustainability?

Amazon (NSDQ:AMZN) is not the largest retailer in the world by transaction value. Alibaba (NYSE:BABA) is. 

Amazon is not the largest retailer in the world in terms of revenue. Walmart (NYSE:WMT) is. 

Wal-Mart and Alibaba are not on the list of Top Seven most valued companies by market capitalization, But Amazon is. 

So, why would a company that is way far off from Alibaba in terms of profitability and lags Wal-Mart by more than four times in sales be valued much higher than either of them? 

The answer, in one word, is “expectation”.

The truth is, despite the other two companies having their own edge over Amazon, the latter leads in terms of what the market expects them to do - not what they’re doing at the moment. All three companies are fighting to become the Alpha Male of Retail, but the market has much higher expectations from Amazon - and there are plenty of reasons why the market could be right.

Also read: Wal-Mart Plans To Challenge Amazon By Becoming More Like Amazon

Amazon’s revenue has been growing at a fast clip over the last ten years - from $10 billion in 2006 to $107 billion in 2015. Of note here is the fact that the growth during 2006 to 2010 was 30%+, but in the last five years, it has come down to 20%+ levels.


Data Source: Morningstar

And here’s why that’s happening.

As a company grows bigger and bigger, the probability of growth slowing down become greater and greater. And this is where Amazon is bucking the trend. Despite growing revenues by over 10 times in the last decade and finally entering the hundred-billion-dollar-club, they’re still at over 20% YoY.

Naturally, being an e-commerce company, Amazon doesn’t have the same kind of problems as Wal-Mart outside the United States. Case in point: while Wal-Mart has yet been unable to tap into the huge India market, Amazon has already taken the Number One e-tailer title there.

Another example would be Germany, where Wal-Mart was forced to shut down operations because it didn’t understand that what works in the United States may not work everywhere else. And Japan and South Korea didn’t fare much better on Wal-Mart’s success list, either.

The Amazon Upside

The potential for growth is huge, especially when you factor in Amazon’s international expansion, which accounted for only 33% of their total revenue in Q1-16. This number is going to grow as Amazon’s revenue grows in Europe and APAC; specifically, in countries that are possibly out of reach of Wal-Mart’s big box store model, and due, in part, to negative political reactions that the company gets wherever it goes.


Data Source: 1redDrop

As for Alibaba, it is still a one-country pony and is yet to prove that it can operate in other countries. That paves the way for Amazon to take the lead and dominate rest of the world, while Wal-Mart struggles to hold its ground at home and Alibaba continues to put all its muscle into growing bigger within China.

The other important factor that has played a huge role in boosting investor sentiment in favor of Amazon is the retailer's technology unit - Amazon Web Services.

Led by newly appointed CEO Andy Jassy, Amazon Web Services (AWS) has been growing faster than other parts of Amazon’s business, and the unit has been extremely profitable for Amazon. At the end of first quarter 2016, AWS' operating profit was more than their North American retail segment and International retail segments.


Datasource: 1redDrop

So, what’s happening now is that the sliver-thin margins of their retail business are “padded out” by their extremely profitable and fast-growing cloud business. The cloud industry is expected to grow at a breakneck pace over the next several years, and AWS is sitting pretty at the top of that growth wave.

As AWS continues to sign on big-ticket enterprise clients like Salesforce (NYSE:CRM) (which was actually building its own cloud business even as it signed up with Amazon), it continues to send a strong message to competitors in the space - namely, Microsoft and IBM.

These two factors - international growth and the cloud unit - represent the biggest upsides for Amazon at this point, and this is why investor expectations are scraping the sky.

Wal-Mart doesn’t have any of this going for it, and neither does Alibaba - and that’s not going to change anytime soon.

But don’t get me wrong: Amazon definitely has competition wherever it sets foot on foreign soil. They have to fight tooth and nail to get to the top in every country - just like any other e-tailer. But the fact is, even though there’s tough competition everywhere, there is no single, direct competitor that can displace them from the dominant position they now occupy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Author's Disclosures & Disclaimers:
  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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