Wal-Mart Is Gaining on Amazon, but Is it a Buy?

Wal-Mart is outshining Amazon on its own turf, but is it time to buy its stock?

May 20, 2014 at 8:15PM

Wal-Mart (NYSE:WMT) is rapidly building its e-commerce business after lagging behind Amazon.com (NASDAQ:AMZN) for years. In the last fiscal year, Wal-Mart increased its online sales by 30% to $10 billion. Amazon's online sales grew at a slower but still healthy pace of 20%.

The disparity remains in the amounts of online sales generated by each company. Wal-Mart's $10 billion in online sales still lags far behind Amazon's nearly $70 billion, but the higher pace of growth is significant and should be taken seriously by Amazon. In Wal-Mart's just-reported first quarter of fiscal 2015, the retailer's online sales jumped 27% -- which shows that its e-commerce presence is picking up steam. Amazon's sales also increased in its recently reported first quarter by 23%, but that percentage increase includes not only retail sales but service sales as well, such as its cloud and media offerings.

Which company is a better buy?

 

P/E

Forward P/E

PEG (5-year)

P/CF

Wal-Mart

16

14

2

11

Amazon

464

89

6

27

Data Source: Yahoo Finance and Morningstar

Amazon has an astronomical P/E on a trailing-twelve-month basis at 464, which is twenty-nine times the P/E of Wal-Mart on that same basis. So Amazon's earnings are twenty-nine times more expensive than those of Wal-Mart. In order to justify Amazon's valuation based on these metrics, an investor really has to believe that Amazon's growth and profitability will not only exceed Wal-Mart's going forward but really outperform most other companies in the broader market as well. Not too many companies carry P/E ratios of 400-plus.

Looking forward, the disparity between Amazon's and Wal-Mart's P/E ratios is not as grand but is still significant. Amazon's forward P/E of 89 is over six times more than Wal-Mart's at 14, but it is important to remember that these values consider projections for the next twelve months. The PEG ratios of the two companies also consider future projections, but they cover a five-year period. A PEG of over one shows overvaluation and Wal-Mart's ratio puts it in that territory. Amazon's PEG exceeds that of Wal-Mart, however, and is pricey at a value of six, three times more than Wal-Mart's PEG. Therefore, both companies have a lot of growing to do and earnings to generate over the next five years to grow into their valuations based on their five-year PEG ratios -- but Amazon has the most to do.

Investors also have to pay almost three times the price for Amazon's cash flow than they do for that of Wal-Mart as the companies have price-to-cash flow multiples of 27 and 11, respectively. Cash flow is important to all companies, but it is especially so for retailers like Wal-Mart and Amazon that have to maintain their capital bases in the form of stores and/or distribution centers.

The e-commerce wars heat up

Walmart Coupons

Source: www.geekalerts.com

Alibaba's IPO will give it cash to expand, perhaps within the United States in addition to its domestic market in China. Alibaba could pose a threat to both Wal-Mart and Amazon if it forays into the U.S. market, but Amazon has the most to lose because it is solely Internet-focused like Alibaba. Wal-Mart is growing its presence online, however, and has a considerable brick-and-mortar presence in China.

Foolish takeaway
Amazon has to maintain its dominant position in e-commerce if it wants to maintain its lofty valuation. Wal-Mart has an easier road ahead considering Alibaba's business model and has an opportunity to not only grow but take market share from Amazon as well. The e-commerce wars are just heating up and all of the players involved will have to hunker down and execute flawlessly to keep shoppers coming back to their sites.

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Andrew Sebastian has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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