- 53-year-old company.
- 11,526 stores worldwide.
- 2.2 million employees worldwide.
- $200.3 billion market capitalization as of Jan. 20.
- 21-year-old company.
- Opened its first brick-and-mortar store in February 2015 in Indiana.
- 222,400 employees worldwide.
- $269.3 billion market capitalization as of Jan. 20 (yes, 1.3x greater than Walmart).
The numbers
Walmart had an average of $408 billion (almost half a trillion)Â in revenue last year while Amazon had an average of just $42 billion in the past nine years.
Even with this mammoth revenue, Walmart has not earned most investors’ praise. In fact, Walmart trades for just 13x earnings, while Amazon is trading at 829x earnings. Yes, almost a thousand times. Talk about being massively overvalued. This is why I am eager to see how Amazon's cash flow is and if it is trading other stocks, my required multiple.
However, giving credit to Amazon, the company was able to grow revenue faster than Walmart. See this computed annual growth rate (CAGR) chart of the aforementioned revenue data.
But this is just the surface; let us move on to profits.
And that is just sad for Amazon shareholders. Or is it?
Isolating Amazon's profits in a table.
It barely made any sustainable profit over these eight years.
Despite that, its stock price rocketed to the moon in the past decade.
Walmart sagged and even underperformed the Standard & Poor's 500 starting in April.
Amazon, on the other hand, outperformed Walmart completely – Amazon has jetpack boosters, whereby it hit an all-time high in December at $693.97 per share.
Before heading right away to cash flow and profit intrinsic valuation, another metric that I just want to compare with the two companies is the D/E ratio. I personally want less than 0.5.
Walmart appears to be steadily hovering at that 0.5 mark, while Amazon, after successfully reducing its debt up to the recession, ramped up its debt annually from 2009 to 2014 so that in 2014 it has a 1.66 D/E ratio.
Next, free cash flow (owner's earnings) comparison:
With Walmart's global presence (not to discount anything from Amazon's online global presence), Walmart earns more for its shareholders than Amazon.
With CAGR:
Amazon has “beaten” Walmart over this eight-year period. Another point goes to Amazon with its growth performance rather than its capacity to produce rivaling amount of earnings for its shareholders.
What do I mean?
Despite Amazon's amazing growth, it barely keeps up with Walmart's. As can be seen in the chart above, as of 2014, Amazon had only 19% of Walmart's total owner's earnings – lower than the 2007-2009 highs.
But isolating and comparing Amazon with Walmart's numbers is just as unfair, although it seems that that's how the investing public sees Amazon – a growth titan – and Walmart – a lumbering giant.
There is Target (TGT, Financial), which is developing its online business well; an emerging JC Penney (JCP, Financial); another growth machine, Costco (COST, Financial), and so on.
There is a lot more comparison to do, but now begins some valuation – starting with EPS.
Earnings per share
Using a simple intrinsic value model, I arrived at the following valuation for both:
These findings suggest that Amazon is overvalued by 69%, while Walmart is overvalued by only 6%.
The next method of valuation uses both Amazon's and Walmart's owner earnings growth over the past eight years in a discounted cash flow model.
The key number for this type of valuation is the company's free cash flow (owner earnings), thus discounted “cash flow” model:
Making a quick comparison (again) between the two, it seems that Walmart has “figured it out” in terms of producing a good amount of profits to serve its current shareholders. Walmart clearly does not go berserk and spends more money each year to produce its profits when compared to Amazon's business model.
Looking at Amazon's spending, it appears that it is yet to build more fulfillment centers for its prime members. See more details here and here.
I guess it's all about growth and probably customer service that may have influenced this amazingly high valuation of Amazon compared to Walmart.
Further research led me to find that Walmart's customers are slowly becoming dissatisfied while Amazon is keeping its customers mostly happy.
The Discount Cash Flow Model using Capital Asset Pricing Model (CAPM).
Using Investopedia's outline:
I first identified the variables (data accurate as of Nov. 25, 2015):
Now, all I need is to run the numbers in a discounted cash flow model. I prefer using a two-stage discounted cash flow model whereby there would be a required terminal growth.
I assigned the terminal growth for both companies, assuming that Amazon grows faster than Walmart. I, therefore, put 5% for Amazon and just 2% for Walmart.
Growth rate was calculated earlier as owner earnings CAGR (scroll up).
I deducted net debt (total debt minus total cash) from the discounted owner earnings before arriving at the intrinsic value.
Now, this more likely explains Amazon's premium at current prices.
Averaging those previous intrinsic values I calculated along with this DCF I just made, I arrived at the following intrinsic values for each:
Amazon = (8.28+253.78)/2 = $131.03 per share
Walmart = (57.36+74.08)/2 = $65.72 per share
No doubt these valuations are conservative, but I will try not to buy any more than these values, yet demand a 30% premium to each before deciding to buy in. Thus, my buy price will be:
Amazon: $92 per share
Walmart: $46 per share
Before reading through any more “Amazon vs. Walmart” comparison articles like this recently published one, the right question will be (at least for me), will Amazon ever be like Walmart? The answer is no.
Comparing Amazon and Walmart tends to be like an apples-to-oranges examination. Therefore, be wary when you see articles trying to compare these two companies.
Disclosure: I have shares in Walmart but do not plan to initiate purchase within the next 24 hours. I am not a professional financial analyst. This is just a hobby. My work is not error-free, but I strive for it to be. Do not consider this buy or sell advice. Invest at your own risk.
