Amazon: This Is Why Wal-Mart Kept Me Up At Night

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From Seeking Alpha:

A perfect comparable doesn’t exist for Amazon, so I often compare it to Wal-Mart. While Wal-Mart and Amazon sell their products in different ways, the majority of each is still comprised of retail sales. In the future, each will also become more and more alike. Wal-Mart is expanding its e-commerce business, and Amazon is building physical stores and just bought Whole Foods. When all of the sexiness of Amazon is stripped away and the crazy ‘what if’ scenarios are removed, I think few people would buy Amazon over Wal-Mart at its current valuations.

Based on enterprise value, Amazon is currently valued 1.76x more than Wal-Mart, but Amazon produces significantly less revenue. Amazon’s 2016 sales were $136 billion; Wal-Mart’s were $485 billion. This equals a Price/Sales multiple of 3.27x for Amazon and 0.47x for Wal-Mart. Amazon does have better gross margins, which is mostly a result of Amazon Web Services, and they are growing much faster. There’s no doubt Amazon deserves a premium, but a Price/Sales multiple that’s 7.2x Wal-Mart’s just seems crazy to me.

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I also believe this is an optimistic scenario for Amazon. There is no guarantee that it can continue growing at 20% for the next eight years. Also, Amazon will likely have a difficult time turning 6% of its sales into free cash flow. (Wal-Mart turns 3-4% of its sales into free cash flow). Amazon Web Services will definitely help, but a lot of Amazon’s growth will come from expanding food sales, which will bring down margins.

Link to the rest at Seeking Alpha

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