Wal-Mart Stores, Inc. (WMT), Amazon.com, Inc. (AMZN), eBay Inc (EBAY): Will ‘This Brick-And-Mortar’ Giant Dominate Online?

Price wars?

Wal-Mart has for years been the global leader in being “the cheapest.” If it can convert the same formula online, it may oust Amazon as the leader digitally like it did with many of its competitors physically. Amazon already has razor-thin margins and negative earnings, so how much lower can they go? Maybe Wal-Mart can stay solvent longer than Amazon can stay irrational?

The reason I say irrational is because Amazon no longer has a near monopoly in online retail where it can continue to defend its minuscule margins in the name of expansion. Wal-Mart could easily steal away even more of Amazon’s thunder over time by slowly chipping away at its online customers as well. If this happens, Amazon’s only claim to online retail fame will be its “cheapness.”

This may be a problem for Amazon down the road, because Wal-Mart already knows how to stay consistently profitable while being the cheapest, where Amazon hasn’t proven it can yet. Plus, if Amazon loses online retail dominance, it loses a lot of its business. Wal-Mart? Not so much. It still has a massive physical retail empire to fall back on. Every online gain for Wal-Mart is just a cherry on top of its already enormous empire.

The bottom line

While Amazon is a great business and a great company for the consumer, that doesn’t necessarily make it a great stock. Currently carrying a negative P/E and an extremely expensive forward P/E of over 80 times earnings, the company looks like it is being priced in the times of the dot-com era. Sure, the opportunities for growth are there with its cloud services and Kindle line, but the company’s online moat isn’t as secure as it used to be and I just don’t see the current valuations being justified going forward.

Wal-Mart is getting into online retail, and is attractively valued now. The retail giant trades at around 15 times earnings and sports a cheap forward P/E of only about 13. The company also carries a dividend yielding around 2.40%, which adds more safety as well. Wal-Mart is heading into the future with an increasingly digital presence in mind, and its presence may be felt further down the road in a much more powerful way than many people currently think.

The article Will ‘This Brick-And-Mortar’ Giant Dominate Online? originally appeared on Fool.com and is written by Joseph Harry.

Joseph is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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