Wal-Mart Stores, Inc. (NYSE:WMT) and Amazon.com, Inc. (NASDAQ:AMZN) are some of the most powerful retailers in the world. Wal-Mart Stores, Inc. (NYSE:WMT) revolutionized retail with advances in supply chain management, while Amazon brought shopping online. Now, Wal-Mart has grown so large that many question if there is any growth left in the company. Amazon.com, Inc. (NASDAQ:AMZN) worries investors with its lack of profits. Both companies target similar price conscious consumers, and the market will work its magic to create a winner.
Amazon.com, Inc. (NASDAQ:AMZN) started off selling books, and then it branched into selling all sorts of products. Now it functions more like a search engine. Some estimate that more than half of Amazon’s sales come from third parties. This serves as both an asset and a risk. Relying on third party sellers means that Amazon needs to carry fewer goods on its balance sheet and it can make money from high margin listing fees. The downside is that if Amazon upsets these third party sellers, they can take their business elsewhere.
Many investors have been weary of Amazon.com, Inc. (NASDAQ:AMZN) due to its lack of profits. The company counters that it is simply reinvesting for the future and it will open up the profit flood gates at some point. There is definitely merit to this argument. If Amazon’s profit margin was around Wal-Mart Stores, Inc. (NYSE:WMT)’s 3.8% instead of -0.1%, then it would be trading at a price to earnings (P/E) ratio around 60. Given Amazon’s high growth this valuation is somewhat reasonable.
The downside to Amazon is that it still looks like a company looking for its commercial purpose. It operates an ecommerce operation, cloud computing service, an online video service, a content delivery network, and a search engine. Operating all of these separate businesses is expensive and has helped to drive down its free cash flow to $0.485 per share over the trailing 12 months. As soon as revenue growth substantially slows down, the stock could crash.
Amazon.com, Inc. (NASDAQ:AMZN) is a great stock for traders, but investors with 10 year time frames need a concrete profit plan. It is unclear if Amazon will ever be able to offer profits in addition to growth.
The market loves growth, and Wal-Mart Stores, Inc. (NYSE:WMT) has already expanded overseas. With annual sales over $450 billion, it is a huge portion of the world economy. The urbanization of China will boost the company’s bottom line, but it is also growing elsewhere. The company says that it expects to do $10 billion in online sales in 2014. Wal-Mart Stores, Inc. (NYSE:WMT) has strong potential to grow online as Amazon.com, Inc. (NASDAQ:AMZN) alone has total annual sales around $60 billion.
It is much easier for Wal-Mart to make inroads into the ecommerce market, than it is for Amazon to make inroads into the traditional brick and mortar market. There are only a few potential ways for Wal-Mart Stores, Inc. (NYSE:WMT) to substantially increase its growth, and ecommerce is the one of them. Soon or later, Wal-Mart will start attacking Amazon’s home turf.