The stock market and economy are not the same thing. Look no further than Walmart (NYSE:WMT) for proof.
Over the last year Walmart shares are up nearly 20%, opening for trade Jan. 16 at a little over $115 per share. When the company reports its fourth-quarter results analysts are expecting full-year sales of $525 billion. That sounds great, but it’s just 2.1% ahead of last year’s $514 billion. And this has been a very good year for Walmart.
Assuming it hits the mark, Walmart sales will rival those of Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) combined. Its market capitalization of $327 billion, however, is barely one-third of Amazon’s because Walmart brings just 3% of revenue to the net income line. And it’s growing more slowly.
But Walmart’s impact on, and relation to, the general economy, is much greater.
The Amazon Myth
The disparity in valuation explains Walmart’s fascination with competing against Amazon.
CEO Doug McMillon fears that, if present trends hold, Amazon will eventually become the world’s largest retailer. That’s not true.
Amazon revenues may indeed overtake those of Walmart one day, but over half of Amazon revenues are on behalf of third parties. Much of the rest comes from re-selling cloud services and offering digital files. According to Amazon’s third-quarter report, 43% of its revenue came from services. Only about $20 billion of Amazon revenue during the September quarter consisted of retail sales to consumers or businesses. Walmart sales were $128 billion.
The Amazon obsession benefits both companies. Amazon can tweak Walmart about its low wages, as most in-store jobs pay minimum wage. Walmart can tweak Amazon about its tax bill.
Who’s the Monopoly?
The Amazon fixation obscures Walmart’s near monopoly in rural American retail.
Specialty stores have closed, malls are gone, downtown shops are shuttered. If small-town commerce exists it’s at a Walmart. The company’s stores usually are parked at the nearest freeway intersection. Or, if the town is too small for a Walmart and too far from a freeway, you might find a Dollar General (NYSE:DG).
This means Walmart is approaching its growth limit when it comes to U.S. retail. Walmart is getting 18.5% of Americans’ retail spending on food and beverages, against less than 2% for Amazon. Walmart is the country’s third-largest pharmacy, and even has 18% of the auto parts business.
There are two ways Walmart can keep growing. On the top line, Walmart can expand into services like healthcare, where it now has two stand-alone health centers and plans to add more. On the bottom line it can replace people with robots for inventory, stocking shelves and packing groceries. Walmart is also automating picking at its warehouses to replicate what Amazon is doing.
The Bottom Line on Walmart Stock
Walmart stock had a bad 2018. Over the last two years its gain have been just 10%, against a 15% gain for the average stock in the S&P 500.
A few years ago, Walmart was a decent stock for income investors. Its 50-cent dividend yielded nearly 3%.
But by selling the Amazon obsession to investors, Walmart has drawn a lot of money looking for capital gains. With a current 53-cent dividend, the yield is down to 1.8%, the trailing price-to-earnings ratio is up to 23. By any conventional measure Walmart is expensive, with that anemic top-line growth. The company has 60 cents of equity for every dollar of sales. You won’t get fat gains that way.
If Walmart really wants to compete with Amazon, it needs to do even more in services and technology. Maybe it should make a stock play for International Business Machines (NYSE:IBM).
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL and AMZN.