(PHILIPPE HUGUEN/AFP/Getty Images)
Warren Buffet is best known for being an investment guru. Applying his framework for evaluating a company's value is particularly insightful when considering the granddaddy of retail matchups: Amazon vs. Walmart. While the smart money is currently on Amazon, it might be worth questioning the experts on profit margins, stock prices, company performance and evaluation of external factors.
How Are Profit Margins?
Retail’s profit margins are notoriously thin. The e-tail (electronic retail) space is especially tricky, where only two pure-play e-tailers (Amazon and Overstock) have become and stayed profitable. The primary source of profitability for Amazon has been through Amazon Web Services (AWS). With the rise of Google Cloud, Microsoft’s Azure and even Walmart’s OneOps, that market is becoming more competitive, increasing the likelihood of smaller margins.
On the retail side, Amazon tailors itself to a higher income demographic, while a larger proportion of Americans shop at Walmart. During a recession, consumers tend to pull back on the consumption of nonessential goods, which would disproportionately impact Amazon. Walmart’s broader base and draw among lower-income customers mean a higher proportion of its basket is comprised of inelastic goods. Ostensibly, a recession will hit Amazon harder because of the amount of luxury goods it sells. If Walmart can maintain profitability as it expands into e-tail, it will be setting itself up to be more recession-proof than Amazon.
How Healthy Are Stock Prices?
No one wants to buy stocks at a peak. People naturally assume if a stock has gone up for a long time, it will continue to go up. This is most often true of high-margin companies like Alphabet or Apple that can sustain those margins. Any time you see stocks skyrocket without commiserate profit gains, it should raise a red flag. Amazon’s stock value has grown exponentially as AWS has become profitable, and future profits are not a sure thing with increased competition.
On the other hand, Walmart’s stock has underperformed recently, despite remaining profitable in the digital age. Unlike other brick-and-mortar stores, it has been able to avoid damaging store closure announcements while Amazon has ballooned. Like Amazon, Walmart has been inventing cool new widgets to make shopping easier, solving customer friction points and growing its e-commerce division at an eye-popping 69% YOY rate. Watch out, drones -- even flying objects are being challenged by Walmart!
Despite these victories, Walmart stock has not seen double stock price growth like Wayfair or Amazon, leading some to conclude it's undervalued relative to its competition. If the stock values level out, it could tilt the current consumer perception momentum back toward Walmart, not to mention new capital for future R&D.
">(PHILIPPE HUGUEN/AFP/Getty Images)
Warren Buffet is best known for being an investment guru. Applying his framework for evaluating a company's value is particularly insightful when considering the granddaddy of retail matchups: Amazon vs. Walmart. While the smart money is currently on Amazon, it might be worth questioning the experts on profit margins, stock prices, company performance and evaluation of external factors.
How Are Profit Margins?
Retail’s profit margins are notoriously thin. The e-tail (electronic retail) space is especially tricky, where only two pure-play e-tailers (Amazon and Overstock) have become and stayed profitable. The primary source of profitability for Amazon has been through Amazon Web Services (AWS). With the rise of Google Cloud, Microsoft’s Azure and even Walmart’s OneOps, that market is becoming more competitive, increasing the likelihood of smaller margins.
On the retail side, Amazon tailors itself to a higher income demographic, while a larger proportion of Americans shop at Walmart. During a recession, consumers tend to pull back on the consumption of nonessential goods, which would disproportionately impact Amazon. Walmart’s broader base and draw among lower-income customers mean a higher proportion of its basket is comprised of inelastic goods. Ostensibly, a recession will hit Amazon harder because of the amount of luxury goods it sells. If Walmart can maintain profitability as it expands into e-tail, it will be setting itself up to be more recession-proof than Amazon.
How Healthy Are Stock Prices?
No one wants to buy stocks at a peak. People naturally assume if a stock has gone up for a long time, it will continue to go up. This is most often true of high-margin companies like Alphabet or Apple that can sustain those margins. Any time you see stocks skyrocket without commiserate profit gains, it should raise a red flag. Amazon’s stock value has grown exponentially as AWS has become profitable, and future profits are not a sure thing with increased competition.
On the other hand, Walmart’s stock has underperformed recently, despite remaining profitable in the digital age. Unlike other brick-and-mortar stores, it has been able to avoid damaging store closure announcements while Amazon has ballooned. Like Amazon, Walmart has been inventing cool new widgets to make shopping easier, solving customer friction points and growing its e-commerce division at an eye-popping 69% YOY rate. Watch out, drones -- even flying objects are being challenged by Walmart!
Despite these victories, Walmart stock has not seen double stock price growth like Wayfair or Amazon, leading some to conclude it's undervalued relative to its competition. If the stock values level out, it could tilt the current consumer perception momentum back toward Walmart, not to mention new capital for future R&D.
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