Let’s begin with full disclosure: I own $WMT. I don’t own $AMZN. I shop both regularly, particularly the Sam’s Club division of $WMT for numerous products, and principally books and music from $AMZN. I’m a loyal customer of each.As an investor however, the Amazon valuation continues to baffle me.
I’ve compiled some numbers and ratios from each company for the trailing twelve months as of July 31, 2013 for $WMT and June 30th for $AMZN.To make my job easier, I’m listing Wal-Mart first each time in the following comparisons.
Revenue: (in billions)
Absolute: $470.0 vs. $66.8
Revenue Growth $: $12.4 vs. $12.5
Revenue Growth %: 2.7% vs. 23.1%
There is no question that the clear growth winner is Amazon – adding $100 mil more in revenue in the last twelve months despite Wal-Mart’s base size advantage. And the rate of growth is indeed impressive at almost 10X Wal-Mart’s.
Operating income: (in billions)
Absolute: $28.0 vs. $0.6
Operating income growth $: 0.6 vs. $0.0
Operating income growth %: 2.2% vs. 0.0%
Operating income as a percentage of total revenue: 6.0% vs. 1.1%
While Amazon matched Wal-Mart’s revenue growth, Amazon managed to add $12 billion in revenue and not have any of that flow to operating income.
Net income: (in billions)
Absolute: $17.1 vs. $0.0
Net income growth $: $0.8 vs. $(0.8)
Net income growth %: 5.1% vs. (115.1)%
Amazon essentially has no income.
Cash Flow: (in billions)
(Note: I’m using a very simplified measure of operating cash flow- - net income plus depreciation and amortization. Clearly incorporating working capital changes is better. But that would take more time for this little project than I have.)
Absolute: WMT $24.4 bil vs. AMZN$ 2.6 bil
Cash flow as a percentage of revenue: WMT 5.2% vs. AMZN 3.9%
ROIC: WMT 16.4% vs. AMZN (1.0)%
ROE: WMT 23.5% vs. AMZN (0.7)%
Clearly holders of Amazon are being rewarded for stellar revenue growth and industry disruption. And one could argue that those factors require some non-traditional valuation techniques. I would argue to the counter: Amazon is not a new business; it has been around now for a generation. I assume that there is little further efficiency gain for Amazon – it operates highly efficiently today – or any productivity gains they achieve are likely to be matched by similar gains by Wal-Mart. Therefore, it is difficult to see how Amazon produces an attractive return on capital without price increases-which would, in turn, reduce its advantage.
There are claims that Amazon’s real value lies in its cash flow. But WMT’s cash flow dwarfs AMZN – albeit that much of that is consumed by dividends which AMZN doesn’t pay.
WMT’s ROE benefits nicely from years of stock buybacks thinning the equity as well as a decent level of leverage. The resultant ROE (using an average of beginning and ending equity) is a very respectable 23.5% and ROIC, helped by very low interest rates, is an attractive 16.4%. Conversely, I would argue that, while Wal-Mart can clearly handle its debt load, the amount of leverage may be hurting the share price some.
Finally, the returns on capital speak for themselves. If you have essentially no income, you have no return to capital. If shareholders never demand a return of their capital, then I suppose there is no reason to provide a return. A unique business model indeed.
I’ll continue to hold Wal-Mart, collect my increasingly rich dividend, and shop at both. I predict that Amazon’s share price will come to earth at some point, but I don’t have a sufficient conviction to short it – and shorting against a billionaire CEO is too risky a strategy for me.