Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Battle of the Titans: Wal-Mart Versus Amazon

In my recent article about the Apple stock split, I used Wal-Mart Stores (NYSE: WMT  )  as an example of the type of successful company that typically splits its stock. Thinking about Wal-Mart's long-term track record of consistent performance got me wondering about how the worldwide retail leader compares to online retail juggernaut (NASDAQ: AMZN  ) . Retail has been transitioning from physical stores to the online realm over the past decade, so does that mean it's time to sell Wal-Mart and buy Amazon?

Tale of the tape
Comparisons of any retail stocks should always begin with one of the classic valuation metrics: the P/E ratio. A chart of the share prices of the two companies shows that Wal-Mart's share price has gained a respectable 41% over the past ten years, while Amazon's share price has ballooned 515% during the decade!


Amazon's price explosion is the reason why our Amazon versus Wal-Mart battle gets off to a puzzling start. Wal-Mart's P/E ratio of 15.6 is a typical, reasonable multiple for a large retail company. However, Amazon's P/E ratio has now grown to a bloated 509.8!

What is it about Amazon that has investors overlooking such an egregious P/E ratio? Amazon has a strong following of people who believe in the company. If you ask the average person on the street which stock is a better buy between Wal-Mart and Amazon, they would likely choose Amazon and give reasons such as "Amazon is expanding so fast" or "Amazon is the future and Wal-Mart is the past" or "I shop on Amazon all the time!"

Amazon's incredible growth
Is Amazon's "rapid expansion" the reason why Amazon's stock is so much more expensive than that of Wal-Mart? According to, Amazon's five-year projected annual earnings growth rate is an astounding 46.6% compared to Wal-Mart's meager 7.9% growth rate! That is a huge difference; but if you compare the PEG ratios of the two companies, Amazon's ratio is still a whopping 11.0 compared to Wal-Mart's 2.0. So the growth rate is not the only reason why Amazon is so expensive.

Changing of the guard?
Could the reason for Amazon's lofty price be that Amazon is the future of retail and Wal-Mart is a relic of the past? I remember hearing the argument that the Apple iPhone was "the past" and that Google Android was "the future" last year when Apple was trading in the low $400's before the split. That argument never made much sense to me at the time. Projections predict that Apple will grow its earnings in the foreseeable future at a rate of about 15% annually, and that's one of many reasons why Apple's share price is up over 50% in the past year.

It seems to me that the way to tell if a company is "a thing of the past" is to look for a negative growth rate. For example, I would consider a newspaper such as the New York Times to be a thing of the past, and its five-year projected annual EPS growth rate of -5.8% seems to support that belief. Clearly Amazon's growth rate dwarfs that of Wal-Mart, but Wal-Mart certainly isn't going away any time soon. In fact, in addition to its projected 8% earnings growth, Wal-Mart expects to open 115 supercenters and 120-150 new smaller stores by the end of 2014. 

Company Price 2013 Net Income EPS Next 5Y P/E PEG
Amazon $326.27 $17.0 billion 46.6% 509.8 11.0
Wal-Mart $75.28 $0.27 billion 8.1% 15.6 1.9

The Amazon party
Since growth is not the reason why Amazon's stock is so much more expensive than that of Wal-Mart, and Wal-Mart is not riding into the sunset anytime soon, is there something in the popularity of the companies that makes a difference? While the answer to this question should be "no," oftentimes the popularity or public perception of a company is one of the most important factors when it comes to its share price.

Boring ole Wal-Mart has been around for decades making the same ole boring $15 billion annual profit. Talk about a snooze fest. Amazon, on the other hand, is the new and exciting company! So what if its annual net income is only only $270 million? Haven't you heard? Amazon is "the next big thing!" Sometimes traders get so excited about a company that they don't care how expensive the shares are getting. They just don't want to feel like they are left out of the party.

And the winner is...
I would argue that with a PEG ratio of 11 this excitement surrounding Amazon looks a lot like what Alan Greenspan and Robert Shiller refer to as "irrational exuberance." Others would argue that at $326 per share Amazon is worth every penny and will eventually justify the high share price years down the road. But with the S&P 500 making new all-time highs seemingly on a weekly basis, I would be very leery of stocks with extremely high multiples such as Amazon. Wal-Mart is certainly not a company that is very exciting, but consistently making money in the stock market over time is sometimes a boring process. 

Will this stock be your next multi-bagger?
Give us five minutes and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3002786, ~/Articles/ArticleHandler.aspx, 8/31/2015 2:11:41 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Wayne Duggan

Wayne was born in a small town in rural Alabama, but worked his way through school at MIT. He is the author of the book Beating Wall Street with Common Sense and the developer of You can follow Wayne at

Today's Market

updated Moments ago Sponsored by:
DOW 16,549.87 -93.14 -0.56%
S&P 500 1,978.61 -10.26 -0.52%
NASD 4,799.78 -28.55 -0.59%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 1:56 PM
AAPL $113.48 Up +0.19 +0.17%
Apple CAPS Rating: ****
AMZN $513.60 Down -4.41 -0.85% CAPS Rating: ***
GOOG $626.75 Down -3.63 -0.58%
Google (C shares) CAPS Rating: ****
NYT $12.24 Down -0.09 -0.73%
The New York Times CAPS Rating: *
WMT $64.78 Down -0.16 -0.25%
Wal-Mart Stores CAPS Rating: ***