These giants are battling it out to control the retail space in a battle between traditional and tech, but is Walmart in a better position to prosper?
Sept. 29, 2020
Walmart (NYSE: WMT), the largest brick and mortar retailer in the world has been resilient in the face of rising competition from Amazon (NASDAQ: AMZN) and a drop in overall retail sales. But, is Walmart still the better investment?
What are Walmart’s moats?
Since its founding, Walmart has prided itself on a wide range of products and low prices by leveraging the economies of scale to deliver this. It has grown to 11,500 stores in 27 countries which is a testament to this model. Its financial strength also enables it to invest in R&D, which is evidenced in its recent e-commerce growth, which is eating into Amazon’s market share.
Adapt or die
Currently, Amazon dominates e-commerce with approximately 38% market share compared to Walmart’s distant second at 5%. However, Walmart has been investing heavily in delivery and improving its shopping app, recently partnering with Shopify to allow merchants onto its third-party marketplace. Walmart’s U.S. e-commerce sales grew 97% in fiscal Q2 of 2020, which demonstrates the growth and success to date of this division.
In a bid to step up its game and compete with Amazon Prime, Walmart recently launched Walmart+, which allows customers to get same-day delivery along with fuel discounts and other benefits for a subscription fee of $12.95 a month.
Walmart continues to find new ways to grow and is taking a 7.5% stake in TikTok for a fee that is still unknown. However, cash and cash equivalents in Q2 came in at $16.9 billion, so it is safe to assume that it can afford this purchase. This move may help to supercharge its advertising business and adds another dimension with something that Amazon does not have.
Is Walmart safer than Amazon?
Amazon has faced growing threats in recent times, a major one being the rise in antitrust sentiment and calls to break it up, as well as alleged data breaches and rising numbers of fake reviews. In September 2020, the European Commission also opened an investigation into anti-competitive practices.
Amazon also faces numerous lawsuits surrounding defective products being taken all across the U.S. A California appeals court ruled that Amazon can be held liable for defective products sold through its marketplace. With further lawsuits ongoing, this could be a major issue with 58% of physical gross merchandise sales coming from third-party sellers.
Walmart, on the other hand, faces fewer legal challenges; however, it is not immune to risk. It faces threats due to a rise in e-commerce, and for example, a rise in wages in countries where its factories are located could hurt the business. Walmart must continue to adapt to consumer taste but has proven its ability to do this over time.
How much money does it make?
Total revenue for fiscal Q2 of 2021 was $137.7 billion an increase of 5% year-over-year, and for the fiscal year ending January 31st, 2020, total revenue came in at $524 billion. In comparison, Amazon’s revenue for Q2 of 2020 was $88.9 billion an increase of 40% year-over-year and total revenue for the last fiscal year was $280.5 billion.
Although Walmart generates significantly more revenue, Amazon’s market cap is just under five times larger than Walmart’s at $1.5 trillion. Walmart’s P/E ratio is 22 compared to Amazon’s at 115. This vast discrepancy could be down to the fact that Amazon is growing revenue at a faster rate along with an increasing portion of income coming from future relevant segment AWS.
Unlike Amazon, Walmart has an approximate 1.6% dividend yield and has increased this dividend consistently since 1974.
Walmart is a stable company that is unlikely to grow at a significant rate in the coming years and is combating the risks of e-commerce successfully. Amazon is growing at a faster pace but does face more substantial risks, and depending on your risk appetite, either may be a good buy.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.