Battle of the Titans: Wal-Mart Versus Amazon
In my recent article about the Apple stock split, I used Wal-Mart Stores as an example of the type of successful company that typically splits its stock. Thinking about Wal-Mart's long-term track record of consistent performance got me wondering about how the worldwide retail leader compares to online retail juggernaut Amazon.com . Retail has been transitioning from physical stores to the online realm over the past decade, so does that mean it's time to sell Wal-Mart and buy Amazon?
Tale of the tape
Comparisons of any retail stocks should always begin with one of the classic valuation metrics: the P/E ratio. A chart of the share prices of the two companies shows that Wal-Mart's share price has gained a respectable 41% over the past ten years, while Amazon's share price has ballooned 515% during the decade!
Amazon's price explosion is the reason why our Amazon versus Wal-Mart battle gets off to a puzzling start. Wal-Mart's P/E ratio of 15.6 is a typical, reasonable multiple for a large retail company. However, Amazon's P/E ratio has now grown to a bloated 509.8!
What is it about Amazon that has investors overlooking such an egregious P/E ratio? Amazon has a strong following of people who believe in the company. If you ask the average person on the street which stock is a better buy between Wal-Mart and Amazon, they would likely choose Amazon and give reasons such as "Amazon is expanding so fast" or "Amazon is the future and Wal-Mart is the past" or "I shop on Amazon all the time!"
Amazon's incredible growth
Is Amazon's "rapid expansion" the reason why Amazon's stock is so much more expensive than that of Wal-Mart? According to finviz.com, Amazon's five-year projected annual earnings growth rate is an astounding 46.6% compared to Wal-Mart's meager 7.9% growth rate! That is a huge difference; but if you compare the PEG ratios of the two companies, Amazon's ratio is still a whopping 11.0 compared to Wal-Mart's 2.0. So the growth rate is not the only reason why Amazon is so expensive.
Changing of the guard?
Could the reason for Amazon's lofty price be that Amazon is the future of retail and Wal-Mart is a relic of the past? I remember hearing the argument that the Apple iPhone was "the past" and that Google Android was "the future" last year when Apple was trading in the low $400's before the split. That argument never made much sense to me at the time. Projections predict that Apple will grow its earnings in the foreseeable future at a rate of about 15% annually, and that's one of many reasons why Apple's share price is up over 50% in the past year.
It seems to me that the way to tell if a company is "a thing of the past" is to look for a negative growth rate. For example, I would consider a newspaper such as the New York Times to be a thing of the past, and its five-year projected annual EPS growth rate of -5.8% seems to support that belief. Clearly Amazon's growth rate dwarfs that of Wal-Mart, but Wal-Mart certainly isn't going away any time soon. In fact, in addition to its projected 8% earnings growth, Wal-Mart expects to open 115 supercenters and 120-150 new smaller stores by the end of 2014.
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The Amazon party
Since growth is not the reason why Amazon's stock is so much more expensive than that of Wal-Mart, and Wal-Mart is not riding into the sunset anytime soon, is there something in the popularity of the companies that makes a difference? While the answer to this question should be "no," oftentimes the popularity or public perception of a company is one of the most important factors when it comes to its share price.
Boring ole Wal-Mart has been around for decades making the same ole boring $15 billion annual profit. Talk about a snooze fest. Amazon, on the other hand, is the new and exciting company! So what if its annual net income is only only $270 million? Haven't you heard? Amazon is "the next big thing!" Sometimes traders get so excited about a company that they don't care how expensive the shares are getting. They just don't want to feel like they are left out of the party.
And the winner is...
I would argue that with a PEG ratio of 11 this excitement surrounding Amazon looks a lot like what Alan Greenspan and Robert Shiller refer to as "irrational exuberance." Others would argue that at $326 per share Amazon is worth every penny and will eventually justify the high share price years down the road. But with the S&P 500 making new all-time highs seemingly on a weekly basis, I would be very leery of stocks with extremely high multiples such as Amazon. Wal-Mart is certainly not a company that is very exciting, but consistently making money in the stock market over time is sometimes a boring process.
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The article Battle of the Titans: Wal-Mart Versus Amazon originally appeared on Fool.com.Wayne Duggan is the author of Beating Wall Street with Common Sense and the developer of tradingcommonsense.com. Wayne Duggan owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, and Google (C shares). The Motley Fool owns shares of Amazon.com, Apple, and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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