Buy better: Amazon vs Walmart
In the retail world, there are Walmart (NYSE: WMT) and Amazon (NASDAQ: AMZN), and then there is everyone.
Together, the two companies generated nearly $ 1 trillion in revenue last year. Walmart is the world’s largest company by revenue, generating $ 559 billion, while Amazon is not far behind at $ 386 billion, adding more than $ 100 billion in sales per year. last.
For investors, Amazon has been the big winner, as the e-commerce giant has increased its profits in recent years through companies such as cloud computing, its third-party market, and advertising. As you can see from the graph below, Amazon has significantly outperformed Walmart over the past five years, while Walmart shares have only matched S&P 500.
However, past performance is no guarantee of future returns, and both companies are changing rapidly. Let’s take a look at what each of these retail titans have to offer and figure out which one is the best buy.
Amazon: from e-commerce to everything
The past year has clearly shown the dominance of Amazon. Already the country’s second-largest company in terms of revenue, it increased sales by 38% in 2020, shaking up the law of large numbers, which says growth will slow as businesses grow bigger. The pandemic has shown that Amazon offers investors both the benefits of a basic consumer products company, providing products such as toilet paper and disinfectant wipes, and the scale and growth of a technology company, with its leadership in cloud infrastructure, the rapid growth of its digital advertising business and its emergence in areas such as voice-activated technology.
Not only did Amazon’s revenue skyrocket last year, but its profits nearly doubled. After decades of investing in order fulfillment infrastructure and its Prime loyalty program, the company is now rapidly gaining operational leverage, entering a new phase of business. Net income jumped from $ 11.6 billion in 2019 to $ 21.3 billion last year, even as Amazon faced billions in costs related to COVID-19. Much of the company’s growth now comes from high-margin businesses like cloud computing, advertising, its third-party market, and order fulfillment, all of which stem from the strength of its e-commerce business and its reputation for customer satisfaction.
This bodes well for Amazon as the tailwinds of the pandemic begin to recede, and it still looks like Wall Street is underestimating its profit potential. At this point, Amazon may be its own worst enemy as a potential antitrust investigations seem to be the biggest threat to the business. Additionally, founder and CEO Jeff Bezos plans to to resign later this year, although he will remain executive chairman when Andy Jassy, CEO of Amazon Web Services, takes the reins. While not a risk in the short term, a new CEO could mean a change or a weakening of the culture in the long term. This would be negative for long-term investors, so they should keep an eye on the transition.
Walmart: an evolving retail giant
When you think of Walmart, you probably imagine one of its cavernous department stores, selling everything from groceries to sporting goods to t-shirts, but today’s Walmart is on the way. to become much more than a chain of bricks and mortar. The company has invested heavily in its e-commerce infrastructure, adding grocery pickup and delivery capabilities to most of its stores in the United States, offering free one-day delivery with a minimum order of $ 35 and introducing Walmart +, a loyalty program offering similar benefits to Amazon. First. It is also building its own e-commerce marketplace, challenging Amazon in an area where it essentially has a monopoly. This helped make Walmart the second-largest e-commerce company in the country, with e-commerce sales in the United States increasing 69% last year.
Beyond e-commerce, Walmart is focusing on using its stores to capitalize on the growth of new, higher margin companies, just like Amazon did with its proprietary e-commerce business. For example, Walmart is opening health clinics in its stores and has launched a health insurance brokerage. Having stores within 10 miles of 90% of the US population gives the company a competitive advantage in physical access, and adding health clinics seems like a natural fit, as Walmart is already a destination. common for so many Americans.
Walmart is also starting a fintech company with help from Robinhood’s backer Ribbit Capital. Details are scarce at this point, but the company recently launched at Goldman Sachs leaders for the start-up, a promising sign. Digital payments appear to be another promising area of growth for a business that already has a relationship with unbanked or under-banked customers.
Finally, Walmart sees an opportunity in data monetization and advertising, leveraging its own knowledge and digital real estate to sell to vendors and brands. His newly renamed advertising company, Walmart Connect, is already enjoying success. Advertising platform Pacvue said a consumer staples brand has doubled its spending with Walmart since March 1, after seeing increased return on investment.
With its e-commerce strengthening its retail force, Walmart has the opportunity to improve margins with new businesses in areas such as healthcare, fintech and data.
What is the best buy?
These two companies have their own distinct strengths, including dominance of their respective sectors of the retail industry. Amazon is more likely to appeal to the growth investor, while Walmart is more suitable for value or income seekers.
I think both companies are poised to outperform the S&P 500 over the next few years. But of the two, Amazon appears to be the more reliable choice, given the company’s track record, fast growing profitability, and clear competitive advantages in areas such as its Prime loyalty program, extensive distribution network. and its reputation for customer satisfaction.
While Walmart’s new business ventures are exciting and certainly worth watching, its core business as a physical retailer is in a slow growing industry. Therefore, Amazon has a growth advantage and is also quickly gaining influence on the bottom line. It is the best choice here.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.