Walmart Versus Amazon Stock:

For the Next Ten Years, Walmart

has the Most Upside Potential University of Saint Thomas, Opus College of Business

William G. Inglis, Sandra M. Pastrana, B. Keo Chang

Page 1 of 12

Walmart vs Amazon: Which stock and why?

When comparing Amazon and Walmart as long-term 10-year investment opportunities,

we feel that Walmart’s stock has the most upside potential, especially given its stock price is at a

three-year low, and Amazon has the most downside potential given its enormous present

valuation. Walmart has significant opportunity to increase its reach to the consumer by building

out its ecommerce channel, which will result in increased earnings per share. Walmart is also

positioned to maximize its stakeholder value when compared to Amazon, which we deem an

important aspect when evaluating Walmart’s long-term profitability.

Which of the two companies is the market mispricing and why?

Highly visible publicly traded stocks are driven by a collection of short-term perceptions

that do not reflect the underlying fundamentals. Behavioral stocks are often mispriced and we

feel that both Walmart and Amazon are perfect examples. When looking at the fundamentals of

Walmart, it is difficult to justify its low P/E multiple. At the core, Walmart has a supply chain

infrastructure that is highly envied by its retail counterparts given its breadth and depth of market

penetration. However, the market has unduly penalized Walmart for its stagnating top line

growth and recent investment in increased wages. There is a public perception that Walmart is a

monolithic corporation with evil undertones that is becoming a dinosaur when compared to

Amazon. We do not question that perception is reality, however, in the long-term Amazon’s

aggressive strategies for growth will fall victim to the myths of market share dominance.

The consumer now has an unprecedented amount of information at their disposal, making

ecommerce a channel that is here to stay. However, what the market is not pricing into its

valuation of Amazon are the long-term demands of its consumer base. Over time, consumers will

Page 2 of 12

gravitate towards the utilization of multiple channels, whereby they can choose to shop from

their smart phone, visit with a sales associate at a store, or a combination of both (Brown, 2015).

This trend is being referred to as the “omnichannel”, and the consumer is demanding that both a

physical store and ecommerce channel be available. This trend is clearly evident as Amazon has

opened its first Amazon Campus store on the campus of Purdue University (Rosen, 2015). This

“reverse play” is a sign that Amazon is cognizant of the fact that they will only rule the retail

space if they are superior through both channels.

The Market Place Likes Amazon

An additional driver that is propping up demand for Amazon’s stock is the media.

Amazon has been one of the media’s darlings over the last five years and is a company that has

disrupted the full spectrum of retail, from the local bookstore to the Walmart super center.

Amazon is acutely aware of the media’s fascination with its futuristic visions of retail. This is

partly why Amazon has launched its drone program into the public eye. There is small likelihood

that this drone technology will take flight due to recent FAA regulations, but it has been a very

catchy marketing ploy.

The founder and CEO of Amazon, Jeff Bezos, has built an amazing company in the last

20 years, Amazon quietly disrupted the retail marketplace in its first 10 years, and over the last

10 years the retail giants were in denial that it was a viable threat. Since the great recession, the

retail giants have lost their top line momentum and have recently realized the actual threat posed

by Amazon. In the meantime, while the retail giants were caught blindsided by the ecommerce

behemoth, Amazon has been investing in technologies and concepts that are highly

differentiating. For instance, Amazon purchased the robotics manufacturer Kiva, in 2012, in

Page 3 of 12

order to automate their warehousing logistics and ultimately will increase supply chain

efficiencies with lower labor costs.

In conjunction with ecommerce, Amazon has been developing its auxiliary web services

business unit. This includes its media streaming service, Amazon Prime, as well as a host of

cloud computing solutions. Amazon’s recent profitability was attributed to its successful cloud

computing division. This makes us wonder, what is Amazon’s business model? There is no

evidence to suggest that Amazon has been able to figure out what is its true core competency. As

mentioned in Amazon’s recent 10Q filing, Amazon is facing significant competition in its

ecommerce business. The barriers to entry in the online shopping space are quite low, making

competing head to head with the legacy big box retail business a stark reality. In order for

Amazon to differentiate itself, it will have to continue to innovate and provide the customer with

unique solutions to their consumption habits. This will require more investment in its distribution

centers so that Amazon is closer to the customer and can continue to provide its same day

delivery option.

The other threat that Amazon faces is its reliance on UPS and FedEx for its actual

delivery. From 2014 to 2015, Amazon’s shipping costs increased by 26% which was attributable

to its free shipping promotions through Amazon Prime. These increasing costs are eating away at

Amazon’s bottom line and will continue to do so as Amazon focuses on its top line growth. The

danger with its free shipping promotions is that Amazon will grow increasingly dependent upon

them and will not be able to wean themselves off without seeing pushback from its consumer

base. Shipping costs are currently low due to low oil prices, however, any additional increases in

shipping costs will further destroy its ability to turn a profit.

Page 4 of 12

The other major challenge that Amazon faces is that as it continues to grow by double-

digit growth, the complexity of its business will continue to increase. Amazon will have to invest

significant funds into its Informational Technologies to optimize supply chain logistics.

Alongside these supply chain management system improvements will be an increasingly

complex channel relationship management with its vendors. As Amazon increases its product

breadth and availability, it will have to maintain and grow relationships with brands that

currently have strong relationships with competing big box retailers. When comparing Amazon

to Walmart at a buying power level and at a channel management level, Walmart is light years

ahead.

From a sales tax perspective, Amazon has enjoyed the benefits of avoiding sales tax in

many American states, passing those savings down to the consumer. However, as states become

increasingly in need of additional tax revenues, Amazon will be a “Prime” target for sales

taxation. This is already evident in states that have distribution centers, which is a provision of

the Marketplace Fairness Act. As Amazon executes its strategy to entrench itself further into the

United States, it will put itself at risk of experiencing a consumer mass exodus. The savings that

consumers currently experience from the lack of sales tax may be an arbitrage opportunity that

will be regulated. The increased costs from purchasing through Amazon will have an effect on

volume of sales.

As the ecommerce channel becomes increasingly competitive in the United States,

Amazon will have to increase its market penetration on the international stage. This will

introduce many risky challenges when interfacing with a foreign political environment where

online sales may either be warmly accepted or coldly rejected. The recent downturn of emerging

markets has left many multinationals scrambling, and may be a risk that curbs Amazon’s ability

Page 5 of 12

to capture significant international market share. Then when taking into account the likes of

Alibaba Co., Asia’s goliath of ecommerce, there will be incredible amounts of competition.

In summary, Amazon will need to build out its storefront, increase its investment in its

supply chain, and identify strategic distribution center sites that will allow the organization to

capture as much same day delivery sales as possible. Amazon’s international expansion plans

should be taken with a grain of salt as well. The lack of international expertise does not behoove

them. In response to the many strengths, weaknesses, opportunities, and threats, we feel that the

market has overpriced Amazon at a current share value of $659.

We Support Walmart

When looking at Walmart, we feel that the market has unduly penalized Walmart for

various reasons, and is undervalued at a three-year low of $58. There is a perception that

Walmart will not be able to continue its top line growth given the large size of its base. In

addition, the market feels that increasing labor costs will impose a large burden on an

organization that has an economy larger than Norway’s GDP, and has a workforce greater than

two million. We feel that Walmart is taking the right steps with this wage investment, because it

is a component of its stakeholder maximization strategy. Walmart was wise to realize that

without a strong and happy workforce, it will ultimately lose its customers to the likes of

Amazon. In the short term, this investment will impact the bottom line, but in the long term this

investment will further entrench Walmart into the community and will rebuild a positive

reputation.

The other reason that the market has mispriced Walmart is because there is skepticism

that Walmart will be able to recoup its market share that was lost to Amazon’s competitive

Page 6 of 12

ecommerce business. There is significant evidence to suggest Walmart is on a warpath to build

out its ecommerce business and will take Amazon head on. We agree with Doug McMillon,

CEO of Walmart, who recently said, “Today we’re seeing ecommerce companies test stores –

it’s because they see the same customer desire we see … Here’s a key question: Will it be easier

for an ecommerce company to build out a massive store network and create customer service

culture at scale? Or are we better able to add digital and supply chain capabilities and leverage

our existing stores? We like our chances.” He has a point since 90 percent of retail sales still

happen inside the four walls of a physical store.

What changes must Walmart make in order to effectively compete in the internet age?

The retail industry is at a crossroads, where department stores sales have been decreasing

by 4% per year and big box retail top line growth has flat lined. These changes in the retail

marketplace are due to several trends that are here to stay. The largest factor affecting the

performance of the retail industry has been Amazon, which is the most dominant company in the

ecommerce space. Ecommerce has proven to be a highly competitive platform to the big box

retail model because of its labor efficiencies, buying power, and ability to circumvent state sales

taxes without the presence of a distribution center in state lines. The consumer is growing

increasingly accustomed to purchasing items through an ecommerce channel because of its

convenience, ability to price compare instantly, and cost savings.

The global financial crisis in 2008 and 2009, reinforced the importance of price savings

amongst consumers, and companies like Amazon, Alibaba, and Costco were able to deliver to

these demands. The largest pioneer in the discount retail space is Walmart, and it also has not

been immune to the increasingly competitive retail space. Throughout Walmart’s 53-year-old

legacy, it has been building a supply chain infrastructure that its rivals don’t come close to

Page 7 of 12

matching. Walmart’s supply chain footprint is massive, operating in 27 different countries and its

stores are only five miles away from two-thirds of the American population. Walmart is

positioned to increase comparable same store sales in the next decade but leveraging the

backrooms of its stores as mini-warehouse distribution centers.

The president of Walmart.com, Mr. Anderson, plans to roll out a strategy that will

combine Walmart’s stores and existing distribution centers into a “next generation fulfillment

network.” When looking at Walmart’s immense supply chain, it becomes obvious that Walmart

is positioned to capture an increasing share of same day deliveries away from Amazon. In fact,

Walmart may be positioned to outcompete Amazon on this front, which will in the next 10 years

eat away at Amazon’s top line growth initiatives. In order to effectively roll out these initiatives

that the President of Walmart.com and CEO of Walmart have laid out, Walmart needs to

effectively implement them, which will be an incredibly complex task. However, given

Walmart’s past successes in retail and its ability to adapt to changing consumer behaviors, we

feel it will be able to adapt and in doing so will rival Amazon with its ecommerce channel.

Walmart recently invested over $650 million into its Walmart.com platform and continues to

invest billions in its supply chain management software. The leadership has identified that

Walmart’s core competency is its supply chain logistics. In order to innovate for the 21st century,

a whole new host of challenges will need to be solved. For instance, once Walmart rolls out its

initiative to effectively combine Walmart.com and Walmart stores, a dynamic delivery routing

algorithm will have to be implemented. In other words, Walmart must differentiate itself in terms

of strategy from Amazon with its delivery solutions. Because of the density of Walmart stores,

Walmart will be able to provide same day deliveries at a fraction of the shipping costs of using a

major shipper, a key advantage that Amazon does not have at the present moment.

Page 8 of 12

The other strategy that Walmart must implement to become a major ecommerce player is

to recoup the mindshare of its customer as an ecommerce option. In order to do this, Walmart

must promote highly differentiating capabilities in response to its competitors. One major

differentiating service, the omnichannel, will result from the capabilities born from the

combination of a storefront and an online ordering platform. The consumer’s perception of

shopping at a Walmart store verses shopping online at a Walmart.com, should be seamless.

Walmart must promote both of these channels and design a mobile phone interface that

empowers the consumer even more.

The mobile platform will be crucial for Walmart’s long-term strategy of integrating the

online storefront with its physical storefront. Walmart must design a platform that is easy to use

and provides significant value to the consumer. This mobile platform could be used as a tool to

reserve certain products available for pickup at convenient store locations. Also, the mobile

platform could be used as a tool within the stores to read product reviews and receive

promotions. With “geofencing”, the Walmart consumer could opt into this capability, which

would allow Walmart to send promotions to the consumer mobile platform if nearby a Walmart

store or within the store itself. Also, the “geofencing” within the store could direct consumers

with a map of the aisles to their desired products.

Making these solutions convenient and a value add service to the consumer will be

crucial for integrating Walmart’s storefront and ecommerce space. In order to implement these

changes, Walmart will require significant investment in its supply chain management software

capabilities as well as innovation with same day deliveries.

Page 9 of 12

Will Amazon be able to convert ubiquity into profitability?

Amazon’s business model has allowed them to be present everywhere, yet that ubiquity

has not granted them profitability given the high costs it requires. We don’t foresee them being

able to convert that ubiquity into profitability due to the difficulty in international markets and

the inevitable burden of overhead costs and sales taxes.

Difficulty in International Markets

Ecommerce was a land rush in the mid to late 1990’s, and Amazon captured the lion’s

share in the United States. However, Amazon has failed to capture the growing international

ecommerce market outside of its mature North America and Western Europe markets. It is not as

simple as implementing the business model in new markets, as they learned with their

deployment in China. Amazon has literally been displaced with only 1.8 percent (a drop from

eight percent share in 2009) market share in China while the regional competitors, Alibaba and

JD.com, now have 77 and 7.2 percent market share, respectively (Online, 2015, p.24). To be able

to succeed in international markets, additional investments in adapting the model to the local

culture will be necessary.

Overhead Costs and Sales Taxes

Having no storefronts, low wage costs, and no sales tax on out-of-state purchases were

key advantages of the online marketplace (Carter, 2015, p. 8). These advantages have

contributed to lower price points, however, they may become a thing of the past, leading to

weakening competition with the brick-and-mortar stores. Online retailers like Amazon are

moving to add storefronts, which brings with them the overhead costs associated with property

ownership. As long as a business does not have a physical presence in the state of purchase, it

Page 10 of 12

avoids charging sales tax for online sales (Carter, 2015, p. 8). The consumers have the duty to

report any use taxes on their income tax forms but the online purchases are usually small and

don’t get reported. This has resulted in large sums of uncollected tax funds for American states.

This may change in the near future as many states look for additional tax revenue sources. The

inevitable elimination of these major cost-saving advantages will be detrimental to online

retailers, especially Amazon.

Does Profitability Matter?

Profitability does matter. Currently shareholders invest in Amazon for the high

expectations they have for the company, but if Amazon does not become profitable, investors

will end up moving to other opportunities. Amazon has a market cap of $309 billion and the

current share price is at $659, with earning per share at $0.70. Amazon shareholders are paying

over 941 times its earnings. However, for Amazon shares to be worth $600 per share, Amazon

would need a 20 percent compound growth for the next 10 years and two percent in perpetuity, a

5.5 operating income margin, and long term beta of 0.8. We don’t foresee this scenario to be

feasible. Profitability does not seem to matter to shareholders right now, but in the long term it

will.

How would you structure your investment into your chosen company?

Walmart’s stock should be purchased as a long-term play.

Page 11 of 12

References

Barret, T. (2015, April). Amazon.com Inc in retailing (world). Retrieved from Passport GMID

Database.

Brown, M. (2015, February). On solid ground: retail's past, present and future are anchored in

the store. Design: Retail, 27(2), S6+. Retrieved from http://ezproxy.stthomas.edu/login?

URL=http://go.galegroup.com.ezproxy.stthomas.edu/ps/i.do?id=GALE%7CA401777202

&v=2.1&u=clic_stthomas&it=r&p=GRGM&asid=3c3ae15bc5fd987bda870b1aa3661d56

Carter, B. (2015, September). E-Commerce & online auctions in the U.S. Retrieved from

IBISWorld Industry Market Research Database. (IBISWorld Industry Report 45411a)

Kefauver, J. (2015, March 23). Weighing the impact of Walmart's wage increase. Nation's

Restaurant News, 49(4), 14+. Retrieved from http://ezproxy.stthomas.edu/login?URL=

http://go.galegroup.com.ezproxy.stthomas.edu/ps/i.do?id=GALE%7CA407011932&v=2.

1&u=clic_stthomas&it=r&p=GRGM&asid=e82c2bc9c699556afe12c22091dfe236

Online shopping in China. (2015, May). Retrieved from IBISWorld Industry Market Research

Database. (IBISWorld Industry Report)

Retailing in China. (2015, February). Retrieved from Passport GMID Database.

Retailing in the U.S. (2015, June). Retrieved from Passport GMID Database.

Rosen, J. (2015, May 25). Amazon at your campus: the next-generation campus store. Publishers

Weekly, 262(21), 5+. Retrieved from http://ezproxy.stthomas.edu/login?URL=

Page 12 of 12

http://go.galegroup.com.ezproxy.stthomas.edu/ps/i.do?id=GALE%7CA416115916

&v=2.1&u=clic_stthomas&it=r&p=GRGM&asid=3685a4c664fbf7d33f2b2d37d880be2c

Sustainability a Walmart pillar. (2014, March 31). MMR, 31(6), 35. Retrieved from

http://bi.galegroup.com.ezproxy.stthomas.edu/essentials/article/GALE|A366460241?u=cl

ic_stthomas&sid=summon&userGroup=clic_stthomas

Westbrook, G. (2014, August). Internet vs store-based shopping: The global move towards

omnichannel retailing – executive briefing. Retrieved from Passport GMID Database.