Amazon.com (AMZN) was valued at roughly $250 billion at the high point of its run following its recent earnings blowout. Meanwhile, brick-and-mortar retail giant Walmart (WMT) was valued about 8% less, around $230 billion in market capitalization.
Of course, while Amazon fell back to “just” $220 billion in Friday’s trading, AMZN stock still is clearly the dominant player in this pairing.
Normally, I don’t care much for market cap horseraces. Hysterical headlines about Google adding an Uber after earnings are clickbait and don’t mean squat. Once you’re one of the big boys, naturally even a small move can come with massive dollar signs.
But comparisons between AMZN stock and WMT aren’t as obtuse. That’s because the companies are very much peers in what they do, selling all manner of products and aspiring to be the dominant shopping destination of choice both within the U.S. and elsewhere in the world as they grow.
The difference, of course, is that Amazon continues to grow and thrive while Walmart is struggling.
AMZN Stock – No Profits, Amazing Growth
Let’s just nip in the bud the notion of earnings multiples and valuation. Yes, WMT stock has an “attractive” forward price-to-earnings ratio of about 14.5 right now while AMZN stock has a staggering forward P/E of about 200.
But the tale of the tape shows that those attracted to Walmart stock lately have been in a world of hurt, with the retailer up just more than 40% in the last five years vs. about 100% for the S&P 500 in the same period. Even worse is the roughly 6% decline in the past 12 months, proving that WMT stock was hardly a bargain.
Amazon stock, on the other hand, has been booming. AMZN is up about 75% year-to-date in 2015 and over 350% in the last five years.
So much for overvalued.
I’ll admit that if I was Jeff Bezos and Amazon.com was my family business, I’d be socking away profits and would care less about expanding sales. I’d probably issue a dividend, milk the profits and retire in Aruba.
But publicly traded companies are not the same, and suffer under a perpetual growth mandate. In many ways, a company with near-zero margins and double-digit revenue growth is better for shareholders than a company with double-digit margins and near-zero growth.
WMT vs. AMZN stock lately proves that, plain and simple.
Remember, stock prices are often a reflection of future performance as well as the current state of the business. And while Walmart may be profitable right now and remain so in the future, it’s hard to imagine the company transforming into anything different than what it already is.
Consider that Walmart profits for FY2016 are projected to tally $5.01 per share, down from $4.78 in expected earnings this year and down from $5.07 in FY2015. Revenue has grown modestly in each of the last few years, but a five-year growth rate averaging about 3% is hardly anything to shout about.
As an investor looking to what’s ahead, then, why would you expect Walmart to go much of anywhere?
And conversely, why wouldn’t you love AMZN — which, while still burning cash on new projects to hold back profitability, is on track to post double the revenue this year than it recorded in 2011 — a five-year growth rate of over 20% annually in revenue.
When you’re this big and still getting bigger, it’s hard to bet against you. That’s why investors love AMZN stock.
On the other hand, when you’re a lumbering, stagnant mega-cap with no sign of future growth, it’s hard to get excited. That’s why investors hate WMT stock.
It’s as simple as that. And thus, the fact that Amazon is “larger” from a valuation perspective should surprise nobody.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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