Stock Wars -- Amazon Vs. Wal-Mart
Do you want to know the most asked question sent to EdgeFeedback@AgoraFinancial.com?
Out of the hundreds of questions we get each week, there’s one that stands out more than any other.
Here it is — should I buy this or that?
Yep. We get multiple emails like this per day. Someone can’t decide between two stocks to invest in, so they ask us here at The Daily Edge. Which led me to an idea — Stock Wars…
That’s right. I’m introducing a bracket-style competition for stocks that YOU choose!
I’ll do all the work! You just send in your favorite picks, and I’ll give you my unbiased opinion on which stock is a better buy today!
They don’t even have to be related companies…
Apple vs. Google, Ford vs. Bank of America, Boeing vs. Mattel.
Just send your stock choices to EdgeFeedback@AgroaFinancial.com, and I’ll give you my best advice!
Here’s the first matchup…
Wal-Mart Vs. Amazon
The world’s largest retailer vs. the world’s largest e-tailer.
Both of these stocks have been on a tear recently.
Wal-Mart (NYSE:WMT), is up 18% year to date. The company has focused heavily on their e-commerce business recently, most notably with their 2016 acquisition of Jet.com. Since the acquisition, Wal-Mart has quadrupled the number of products on their website, which helped contribute to a 63% spike in online sales last quarter.1
Amazon (NASDAQ:AMZN) has also had an impressive start to 2017. The stock is up 30.1% year to date on the heels of a few stellar earnings reports. Retail revenue continues to increase year-over-year while Amazon Web Services (AWS) — their cloud computing division — continues to take market share, leading to a 42% increase in revenue.2
Compare these two performances to just 8% for the S&P 500 over the same time period.
So which stock is a better buy today? Let’s look at a few metrics.
Subscribers to Lifetime Income Report know that we have a system for evaluating stocks using our three pillars of investment success — Capital Preservation, Growth, and Yield.
Here’s how Amazon and Wal-Mart stack up…
Investment Pillar #1: Capital Preservation
Protecting wealth is my highest priority when investing. As a former hedge fund manager in charge of investing millions for my wealthy clients, my number one priority was to not lose the wealth these investors had worked so hard to accumulate.
I didn’t swing for the fences looking for home runs. Instead, my clients were happy with consistently hitting singles and doubles to generate reliable income while avoiding big declines. That’s exactly the approach I take when looking for investment opportunities to highlight in The Daily Edge.
So when it comes to our investments, buying at an attractive valuation is key. That’s because if you buy stocks at a reasonable value, it’s much less likely that the stock will trade substantially lower. On the other hand, if you pay a speculative price (or a high valuation) for a stock, there’s a much bigger chance that a pullback will cause you to lose some of your hard-earned wealth
Amazon currently trades at a sky-high 142x P/E ratio, up from 112x at the beginning of the year. In other words, investors are paying $142 for every dollar of profits that Amazon generates. This is completely unsustainable if you ask me. How much higher can they trade?
Add in emerging threats from other competitors on both the retail and AWS front, and Amazon’s profits could soon be under attack. With these risks in play, there’s no way I’m willing to pay 142 times Amazon’s earnings to own the stock.
Wal-Mart on the other hand currently trades at a reasonable 18x P/E ratio, which is lower than the industry average of 19x. Yes they’ve had some challenges competing with Amazon, but I have confidence in the e-commerce aspirations lead by serial entrepreneur Marc Lore.
Simply put, Wal-Mart is the better deal. The stock trades at a reasonable value which means that investors are much less likely to lose money from shares pulling back. Amazon on the other hand risks pulling back, and causing investors to lose a significant portion of their capital.
Investment Pillar #2: Growth
There’s a reason why Amazon trades at 142 times annual earnings. It’s because Wall Street expects revenue to grow at an annualized rate of 27% over 3 years and revenue to grow 28% over 5 years.
That’s an insanely high growth rate that Amazon just might be able to achieve. Just look at how their historic growth rates have ramped up:
2014 Revenue Growth: 19%
2015 Revenue Growth: 20%
2016 Revenue Growth: 27.1%
This is a category in which Wal-Mart just can’t compete. Although Wal-Mart’s e-commerce business has expanded after the acquisition of Jet.com, I don’t see the online business adding enough revenue to match Amazon’s aggressive rate of growth.
Wal-Mart is doing a great job, but seriously, is anyone growing faster than Amazon?
Investment Pillar #3: Yield
Whether you’re saving for retirement, college, or a new home, having a reliable stream of dividend payments can make the difference. So when comparing these two companies, Wal-Mart’s 2.5% dividend yield — which, by the way has been growing for 44 straight years — is an easy winner over Amazon’s non-existent payout.
And with victories in both the capital preservation and yield categories, Wal-Mart — that’s right Wal-Mart — is a stock that I would rather buy today over Amazon. Sure, Amazon is growing faster than Wal-Mart. But I believe that growth is already accounted for in the speculative stock price.
Remember, I’m a value investor. No speculation here. I’ll take a steady cash cow like Wal-Mart over the bubble-like stock that is Amazon any day.
Seriously, do you really think Amazon can continue trading at 142 times earnings forever?
Here’s to growing and protecting your wealth!
Editor, The Daily Edge