Should Investors Buy Amazon Stock Instead of Walmart? | AMZN STock Analysis | WMT STock Analysis

SUMMARY

Parkev Tatevosian, CFA, examines the investment prospects of Amazon and Walmart, focusing on revenue, profitability, capital expenditures, and valuation. The discussion highlights Amazon's expanding profit margins and undervalued stock compared to Walmart's efficient online growth and higher current market valuation.

MAIN POINTS

• Amazon surpasses Walmart in trailing twelve-month revenue, reaching $743 billion compared to Walmart's $725 billion. [0:00]
• Amazon's operating profit margin has improved significantly to 12.14%, while Walmart's margin has declined to 4.16%. [1:02]
• Walmart's lower profitability is linked to the higher costs of e-commerce compared to in-store sales, though its online operations have advanced. [2:00]
• Amazon's investments in cloud services drive higher margins, while Walmart's capital expenditures remain lower despite online growth. [3:02]
• Walmart trades at a higher price-to-earnings ratio than Amazon, reflecting market optimism about its online business. [5:00]
• Despite Walmart's achievements, Amazon is considered the better investment based on current valuations and future prospects. [7:01]

DETAILED ANALYSIS

Amazon and Walmart, two of the largest global retailers, have both surpassed $700 billion in trailing twelve-month revenue, with Amazon recently overtaking Walmart at $743 billion. Walmart has demonstrated notable progress in expanding its e-commerce capabilities, leveraging its extensive network of over 10,000 locations to enhance convenience for shoppers and close the gap with Amazon in online sales. However, Amazon has shifted its strategic focus toward artificial intelligence and data center infrastructure, which has contributed to a significant improvement in its operating profit margin.

Amazon's margin now stands at 12.14%, a substantial increase from previous years and notably higher than Walmart's 4.16%, which has declined over the past decade.

The difference in profitability is rooted in the fundamental business models of the two companies. Walmart's traditional brick-and-mortar operations are more profitable per transaction than online sales, but the cost of fulfilling individual online orders is higher. Despite this, Walmart has managed to expand its online presence efficiently, achieving this with a lower capital expenditure-to-revenue ratio compared to Amazon.

Walmart's ratio is currently 3.9%, while Amazon's has exceeded 20% due to heavy investments in data centers and cloud services. These investments have enabled Amazon to generate operating profit margins above 30% in its cloud segment, further widening the profitability gap.

Valuation metrics reveal an interesting dynamic: Walmart's forward price-to-earnings ratio is 37.5, significantly higher than Amazon's 27.8. This premium reflects investor confidence in Walmart's online growth and operational efficiency. However, discounted cash flow analyses suggest Amazon's stock is undervalued at $242 per share relative to a calculated fair value of $297, while Walmart appears overvalued at $109 per share versus a fair value of $73.

The market's optimism about Walmart's future may be overextended, given the structural challenges it faces in matching Amazon's profitability. Ultimately, the analysis concludes that Amazon presents a more attractive investment opportunity at current prices, despite Walmart's impressive recent achievements.

LINKS

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