Skip to main content

Amazon vs. Wal-Mart - My Annual Comparison

Here is a high-level comparison of Amazon to Wal-Mart. Note that Amazon uses a calendar year, while Wal-Mart uses a traditional retail fiscal calendar ending January 31st. I’ve compiled some numbers and ratios from each company for their respective fiscal year periods that include most or all of 2014. Therefore this comparison is slightly off. However, the comparison does include the traditional peak seasons of back-to-school and Christmas in both.
To make my job easier, I’m listing Wal-Mart first each time in the following comparisons.

Revenue: (in billions)
Absolute:  $485.6 vs. $89.0
Revenue Growth $:  $9.4 vs. $14.5
Revenue Growth %:  2.0% vs. 19.5%

There is no question that the clear growth winner is Amazon – adding $5.1 bil 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: $27.1 vs. $0.2
Operating income growth $: 0.3 vs. $(0.5)
Operating income growth %: 1.0% vs. negative
Operating income as a percentage of total revenue:  5.6% vs. 0.2%

While Amazon exceeded Wal-Mart’s revenue growth, Amazon managed to add $14.5 billion in revenue and not have any of that flow to operating income.

Net income: (in billions)
Absolute: $16.4 vs. $(0.2)
Net income growth $: $0.3 vs. $(0.5)
Net income growth %: 2.1% vs. negative
Net income as a percentage of sales: 3.4% vs. (0.3)%

Amazon has no income.

Cash Flow: (in billions)
Note: cash flow as presented here is: cash flow provided by (used in) operating activities. That is, net income plus depreciation, amortization and stock comp plus changes in working capital. These are taken directly from the financial statements filed with the SEC for Amazon and the earnings release for Wal-Mart.

Absolute: WMT $24.4 vs.  AMZN$ 6.8
Cash flow as a percentage of revenue: WMT 5.2% vs. AMZN 7.7%

I’ll admit that I found this percentage was particularly surprising. Given that Wal-Mart starts with a 3.7 percentage point advantage from net income, how does Amazon end up with a higher percentage?  The details point to two factors: depreciation and amortization (non-cash) account for a far larger share of revenue for Amazon [5.33%  than for Wal-Mart [1.88%] and stock compensation (again non-cash) is a much larger percentage of revenue for AMZN than WMT. (Note that Wal-Mart did not show stock comp as a separate component in its earnings release. Therefore I’m concluding that it is less material. WMT certainly has stock comp expense. I may find time to update this when it files its 10K). Given the physical store presence of WMT, AMZN’s higher depreciation and amortization is also somewhat surprising. Does AMZN have a more conservative depreciation policy?

Returns
ROIC: WMT 13.3% vs. AMZN (0.7)%
ROE: WMT 19.6% vs. AMZN  (2.4)%

ROIC defined as net income plus tax-affected interest expense divided by equity capital plus interest bearing debt. Equity plus interest bearing debt is calculated with a two point average of beginning and ending balances.

ROE is a simple net income divided by a two point average of beginning and ending equity.

Valuation
Price to sales: WMT 54.9%; AMZN 200%
Price to book: WMT 3.1X; AMZN 16.6X
Enterprise value to EBITDA: WMT: 8.7; AMZN: 38.

Disclosures
I own $WMT. I’ve owned it for a very long time. 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. I’m also a published author on Amazon Kindle. Two titles: Jobs Over Fifty: The Guide to Finding New Employment for The Experienced Worker and Survive And Prosper Fifty Steps to Job And Career Security.

Observations
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 no longer a new business; it has been around now for a generation.   I assume that there is little further efficiency gain for Amazon–i t operates highly efficiently today–or that any productivity gains it achieves 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. And clearly it is higher as a percentage of revenue.  But WMT’s absolute 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  19.6% and ROIC, helped by very low interest rates, is a little better than average at 13.3%.  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.

My Position

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.

Comments

Popular posts from this blog

Book Review: What Matters Now by Gary Hamel

Interview of Eric Schmidt by Gary Hamel at the MLab dinner tonight. Google's Marissa Mayer and Hal Varian also joined the open dialog about Google's culture and management style, from chaos to arrogance. The video just went up on YouTube. It's quite entertaining. (Photo credit: Wikipedia)Cover of The Future of ManagementMy list of must-read business writers continues to expand.Gary Hamel, however, author of What Matters Now, with the very long subtitle of How to Win in a World of Relentless Change, Ferocious Competition, and Unstoppable Innovation, has been on the list for quite some time.Continuing his thesis on the need for a new approach to management introduced in his prior book The Future of Management, Hamel calls for a complete rethinking of how enterprises are run.

Fundamental to his recommendation is that the practice of management is ossified in a command and control system that is now generations old and needs to be replaced with something that reflects an educat…

7 Ways to Fix Your Gut and Help Your Brain

Author Peter Andrey Smith titled his article on the relationship of the brain to the intestines, and, in particular, the tiny creatures that live in our intestine beautifully: “The tantalizing links between gut microbes and the brain”. If the human brain is the frontier of medical science, the microbiome, those tiny creatures that live in our intestinal tract, is Jupiter. The linkage between what goes on in the gut and the brain is indeed tantalizing, and the subject of research worldwide. There are over 1,000 different kinds of those things living inside us. There are hints that having the wrong mix of gut microbes, or the absence of any particular type, is linked to asthma, irritable bowel syndrome, allergies, depression, Alzheimer’s disease and more. Further, antibiotics, illnesses and other factors can deplete the population. Here are seven things we can do to help keep our little creatures happy and healthy.
Eat the right stuff. There is evidence that the right diet helps keep …

Get REM Sleep; Manage Fear

A good night’s sleep may help you manage fear and risks better.

A study just posted in Journal of Neuroscience describes the importance of a good night’s sleep to controlling strong emotions, especially fear. Previous studies in this area attempted to discover what happens in the brain after a frightful experience.  These prior studies, for example, show how Post-Traumatic Stress Disorder (PTSD) affects sleep. A team at the Rutgers University Center for Molecular and Behavioral Neuroscience, led by Itamar Lerner, has taken a different approach. They wanted to see if there is a relationship between adequate sleep and prevention or management of the brain’s reaction to subsequent stressful events. Research Team Lerner is a Postdoctoral Fellow in sleep research. Along with fellow researchers Neha Sinha-also doing Postdoctoral research-in her case in brain imaging, Shira Lupkin and Alan Tsai, they used new technology that allows mobile tracking of sleep habits over a period of time, not j…