Why Does Amazon Have A Higher Market Cap Than Walmart?
The world's largest discount retailer in the world is Wal-Mart, who generated $485.6 billion dollars in sales over the last 12 months. Over the course of this period Wal-Mart produced $15.5 billion dollar in net earnings. Wal-Mart, the most profitable retailer in the world, is seeing its earnings be compressed by higher cost. The compression of earnings is directly from Wal-Mart investments in employee wages and store improvements. Wal-Marts compression in earnings has lead to shares falling to $64 dollars/share. It isn't a cheap thing to do, and in the short run it will cause compression on Wal-Mart's earnings, but in the long run it will maximize profits for the company.
The table below compares Wal-Mart to its largest competitors in the United States:
|Wal-Mart (WMT)||$485.6 billion||$15.5 billion||3.2%|
|Costco (COST)||$115.9 billion||$2.3 billion||2.0%|
|Amazon.com, Inc. (AMZN)||$95.8 billion||-$0.2 billion||-0.2%|
|Target (TGT)||$72.7 billion||$3.2 billion||4.4%|
Wal-Mart produces 70% more in sales than Costco (COST), Amazon (AMZN), and Target (TGT) combined. Wal-Mart produces 192% more profits than its top competitors combined, and Target is the only competitor that has a higher profit margin than Wal-Mart. When you compare Wal-Mart to its top competitors, the company comes out on top. None of Wal-Mart's competitors produce anywhere near the same earnings, sales, and revenues as Wal-Mart does.
It make no sense for Wal-Mart to sell at a lower market value than Amazon Inc. Wal-Mart generates 5.1x more sales than Amazon. Wall-Mart had more sales in 1994 when ***index for inflation than Amazon does today. Amazon had negative net profits of $188 million dollars in the most recent 12 months results, while Wal-Mart produced $15.84 billion in net profits during this same period. Wal-Mart produces enough net profits that the company could acquire all of Whole Foods (WFM) who has a market cap of $14.6 billion.
Wal-Mart produces 6.1x more profits than Amazon after adjusting for Amazon's depreciation and capital investments. Currently Amazon economic earnings are being compressed by large depreciation of its technology assets and $20 billion in capital expenses. Amazon so investors in its most recently financial results how its earnings are being compressed.
All number below are from Amazon's most recent annual and quarterly results:
- Operating Income - $2,682 million dollars.
- Depreciation - $5,557 million dollars.
- Principal Repayment Of Capital Leases - $1,987 million dollars.
It would take Amazon eight years to surpass Wal-Mart in net earnings. When you look at the numbers, it doesn't make sense for Wal-Mart to have a lower market cap than Amazon. This is the result of people falsely believing that Wal-Mart is a thing of the past and Amazon is the future. Investors are being unrealistic with their valuations of Amazon. Amazon can't keep growing at 20 plus percent a year, and the changes of Wal-Mart not growing at all is unlikely.
Based on this, I believe the market is undervaluing Wal-Mart and overvaluing Amazon. Eventually investors will realize this and there will be a reversal in valuations for both companies. Wal-Mart has massive earnings power that will be difficult for Amazon or any competitor to replicate. This creates a moat around Wal-Mart and its earning power protecting the company from erosion by competitors. Also makes Wal-Mart's earnings more predictable and stable. I can reasonably estimate that in 10 years from now Wal-Mart will be earning between $5.00 and $6.00 dollars/share. I can't estimate what Amazon will be earning in 10 years from now.
The question you should ask yourself is which company you want to hold on to for the next 10 years, Amazon or Wal-Mart?