- Wal-Mart and Amazon have completely contrasting goals at the moment.
- Wal-Mart appears well positioned to take on Amazon.
- If growth potential is the only card that Amazon can play, here's why Wal-Mart seems to be a better bet.
Shares of Walmart (NYSE:WMT) are down 23% over the last 12 months whereas Amazon (NASDAQ:AMZN) is up 36%. This difference in performance has led Amazon to become the biggest retailer by market capitalization with a market value of $245 billion compared to $211 billion for Wal-Mart. Currently, there is no equal to Wal-Mart when it comes to traditional retail businesses, but the giant retailer has failed to match Amazon’s endeavors when it comes to e-commerce. Wal-Mart kick started its online retail in 1999 after realizing that the new marketplace could potentially become a major revenue stream.
However, the company never really seemed to commit enough towards expanding its presence in the new marketplace until about five years ago. Since 2010, Wal-Mart appears to have taken a serious stand with regard to growing its online business in an attempt to catch up with Amazon.
Last year, Wal-Mart increased its product offerings on the e-commerce platform to about 10 million, but this is still way below Amazon’s product line up of about 300 million products. However, following the events of last year, the intention is now clear that Wal-Mart is poised to go head on with Amazon in the battle for online retail business.
Wal-Mart currently reports an annual revenue of about $485 billion, which is the largest revenue figure by any company in the world. As such, it would be almost impossible to report any significant annual revenue growth rates. However, even at these revenue levels, Wal-Mart has still managed to grow revenues for each of the last five years.
Wal-Mart has embarked on a project that will see it fully embrace the paradigm shift in consumer spending which appears to be inclined towards online platforms. While most people still buy goods directly from stores, recent events point to the potential large shift towards online shopping as many retailers continue to launch their own e-commerce platforms.
Wal-Mart has expanded its e-commerce team from about 500 staff members to close to 3,000 members in less than five years and opened four new centers last year, specifically meant for fulfilling online orders, each estimated to be the size of 20 football fields.
Neil M. Ashe, head of Wal-Mart’s e-commerce business believes that Wal-Mart holds the key to the future of retail businesses. Wal-Mart has a massive physical presence across the world. This means that if the company manages to integrate its online business effectively to its global presence, then the potential for revenue growth would be enormous.
Wal-Mart’s end-game is focused on providing customers with a variety of ways to shop, and this is what Mr. Ashe believes could turn the tables against other retailers like Amazon.
“Even the same customer doesn’t want the same thing every time,” Mr. Ashe was quoted by NY Times, last year. “And only we can provide that unique combination of [delivering] it to your home when you want, pick up at our stores and the stores themselves. That unique combination is where we think the world is going, and where we think we are the only ones that can provide that.”
However, Wal-Mart’s online sales growth rate has slowed down consistently from 30% in Q4 2013 to 22% in Q4 2014. In Q3, 2015, the growth rate slowed further to a new low of just 10%. For the first three-quarters of the year 2015, Wal-Mart’s average e-commerce sales growth rate stood at about 15% and analysts expect that the annual growth rate will be close to that figure.
On the contrary, Amazon’s online sales grew by 23% in the most recent quarter. At the moment, Amazon trumps Wal-Mart in terms of online revenue growth.
However, it is important to take note of Wal-Mart’s recent investments in e-commerce, which are expected to yield returns in the coming quarters. As I pointed out earlier, Wal-Mart is looking to increase the number of products offered on its e-commerce platform WalMart.com. Last year, Wal-Mart also invested $1 billion in its e-commerce business.
Right now, Amazon is the world’s largest online retailer but it still faces stiff competition from Chinese e-commerce giant Alibaba, especially in the global market. Amazon has made it difficult for new entrants by selling discounted products, which is also one of the reasons why the likes of Wal-Mart have failed to gain traction.
However, Amazon stock is driven by investors’ hopes that it will one day, turn a profit, rather than compelling valuations and strong fundamentals.
While Amazon’s revenues have grown consistently over the years, the company’s net income has been rather volatile. In the year 2015, Amazon posted its largest net income yet, which explains why shares of the company rallied 36% over the last 12 months.
However, when you look at Amazon's operating margin of just 2% compared to Wal-Mart’s 5%, it shows just how much revenue the former would have to generate in order to post any meaningful net income that could justify its mammoth valuation. As such, Amazon may need to grow its margins rather than just revenue in order to maintain its valuations.
Amazon’s net income of about $600 million compares meagerly with its market cap of $245 billion. One of the main reasons why investors are willing to pay such a huge premium for the Amazon stock is because unlike Wal-Mart, the company doesn't have to bear the costs associated with physical stores. However, Amazon may need to open physical stores in order to sustain its growth story in the near future.
In the end, for Amazon, it will be a race towards opening as many strategic stores as possible while Wal-Mart rallies to grow its online presence. Whichever company achieves its goal first is likely to become the largest retailer by market capitalization in the world, excluding Apple which is primarily a technology company.
Based on recent developments, Wal-Mart appears to have taken a head-start in this race and thus looks like it is a better stock than Amazon.