Amazon (NASDAQ:AMZN) is in the process of becoming Walmart (NYSE:WMT). But no one interested in AMZN stock is asking whether it should.
The “whisper number” on Amazon’s December quarter sales is $112.5 billion. That’s still almost $20 billion short of what Walmart should do for the quarter ending in October. But it’s getting closer, fast.
Almost $53 billion of Amazon revenue in the September quarter came from product sales. That’s a growth rate of 33%. It’s well over one-third of Walmart’s $137 billion in third quarter revenue.
Here’s a heretical question. Is this a good thing?
Investing Cash Flow
As I have written here many times the secret to Amazon is cash flow.
While other companies use their cash flow to buy back stock or pay dividends, Amazon plows its cash flow back into the business. Even in its stellar third quarter report, less than 7% of Amazon revenue hit the net income line.
Amazon had $12 billion in operating cash flow during its most recent quarter. It invested $11 billion in property and equipment. Much of that went to Amazon Transportation Services, the company’s logistics branch. It has a fleet of 80 jets, 30,000 tractor-trailers, and 69 package sorting centers. About two-thirds of its “middle mile” deliveries, that is between warehouses, was done internally last year, and that’s going up.
The strategy is the same one pursued with fulfillment and, before that, with the cloud. Third party sellers, who represent over half the product sales on Amazon’s platform, help pay these costs. They also share in Amazon’s savings. They’re the company’s secret weapon when the anti-trust police come to call. If you’re looking for a merchandising monopoly, know that Walmart controls most of what it sells, while Amazon just moves it.
The problem is that Amazon’s gains from applying its cloud strategy to fulfillment and now, distribution, aren’t that big. Truck and plane costs keep rising, not falling. The only way Amazon can squeeze out more profit is with labor costs. Many truckers have now gone from owning their own rigs to being “gig workers” for Amazon.
Losing Margins
What happens as Amazon becomes Walmart is that it loses margin. For all its control over suppliers, and its distribution network, Walmart’s net income is still less than 5% of sales.
The companies are becoming similar in another way. The fastest growing piece of Walmart’s e-commerce business is now on behalf of third-party sellers. It’s Amazon’s biggest competitor in this area. Walmart’s own operating cash flow came to more than $25 billion during its most recent quarter. Sam Walton invented the cash flow game, not Jeff Bezos.
You can see where Amazon’s strategy is going, in terms of cash flow. But it doesn’t represent margin expansion. Just the opposite. Amazon is putting more cash flow bang into fewer profit bucks.
The Bottom Line on AMZN Stock
Since hitting its peak of more than $3,500 per share in early September, Amazon has been trading more like Walmart. Check that, it’s been trading worse than Walmart. Amazon shares are down 10%, while Walmart shares are flat.
Cloud investments drive more profitable market share than other infrastructure. Amazon’s price-earnings ratio, which was once stratospheric, is now near 90. Still high, because cloud profits are huge, but no longer triple-digits.
You may be tempted to call Amazon a bargain. But it’s really settling down to Earth, its stock measured against competitors. Competitors like Walmart, whose P/E ratio is 23, whose price to sales ratio is about 80%, and whose sales growth this year may hit 4%.
If Amazon expects to maintain its sky-high valuation, it should find another route than becoming Walmart.
At the time of publication, Dana Blankenhorn had long positions in AMZN
Dana Blankenhorn has been a financial and technology journalist since 1978. 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 danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
