First, Amazon (AMZN -3.01%) got America hooked on fast, free shipping of e-commerce purchases with its two-day Amazon Prime perk. Then the company added a raft of other streaming, shopping, and reading-related benefits to the program, which made it an even more compelling deal. Any large retailer that wanted to stay competitive online had to provide something in the same vein. So when Amazon raised the bar with its soon-to-debut one-day free shipping upgrade, the obvious question was: How will its biggest rivals respond?
On Tuesday, Walmart (WMT -2.50%) revealed its official reply: a plan to offer free one-day shipping for 220,000 items from Walmart.com. In this segment from MarketFoolery, host Mac Greer and senior analyst Jason Moser discuss these two businesses, their relative valuations, their strengths and strategies, the investment theses, and more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on May 14, 2019.
Mac Greer: First, we begin with Walmart, taking it to Amazon. Walmart announcing that they are offering free next-day delivery on 220,000 of their most popular items. That's nearly double the number of items Walmart offers in its store. Jason, what do you think?
Jason Moser: That sounds like a lot of items, for sure. Two-hundred and twenty thousand. I always wonder how relevant those items are at the end of the day. Apparently, they're basing these decisions on data, that they are the most popular items. Perhaps it works out.
But here's the thing. Walmart has to do this. I understand people saying, "Wow, this is a great move! Good for Walmart!", but they have no choice in the matter. They have to do this. If they don't, they will continue to lose share to Amazon in the retail space. This move at least helps them keep pace.
You cannot dismiss the market's perspective here, though. When I look at these two companies, we talked about this before, when you look at the companies and you look at their annual sales, and what the market's valuing them at, it's really pretty stark, the difference here. Walmart has over $500 billion in annual sales and a market cap of around $285 billion. Now, Amazon obviously is a bit more diversified. There's the Amazon Web Services side of the business. Let's back that out. It's around $26 billion last year, let's back that out. They made a bit more than $205 billion in retail sales in 2018. Less than half of what Walmart brought in. And the market is valuing Amazon at $900 billion. Amazon's already crossed that $1 trillion mark, too. Clearly, the market's telling you where they think the leader in the space is. That's nothing really new. The only way you keep pace with the leader in the space is by doing what Walmart's doing today.
Greer: OK. When you sketch it out that way, do you think that the market giving Amazon such a rich valuation, the market giving Amazon such a rich multiple, is that primarily because of Jeff Bezos? This idea that you've got this visionary leader, and we're going to just crush you going forward?
Moser: I mean, I think that's part of it. I mean, I think that the market is giving Amazon a lot of credit because of this move toward e-commerce, this reshaping of the retail space, the optionality the business has beyond just e-commerce. Things like Amazon Web Services, let's not forget the investments they're making in actual shipping and logistics. I think that's another important point to note here with Walmart and Amazon and all of these other businesses that are playing their role in this e-commerce environment today. I mean, shipping and logistics, that will become a very central part to this. Remember, it was just a few holiday seasons ago where FedEx and UPS weren't really able to handle the volume that came in during the holiday season primarily from Amazon. That led Amazon to start making more investments in that shipping and logistics market, which is a hundreds and hundreds of billion-dollar opportunity as well. I imagine that this is going to be additional volume that flows into UPS, FedEx, probably the USPS in some way. So, how our shipping infrastructure handles this? That's going to be interesting to see as well. But there's no question that Amazon has been planting a lot of seeds along the way there as well.
Greer: It's worth noting that on Tuesday, Walmart said that it has been building out a network of distribution centers. If they're going to ramp up this next-day delivery, it's going to, to your point, require some serious, serious distribution.
Moser: It is. That's a great point. I think a good thing to note when it comes to Walmart is, they do have a tremendous advantage in the physical presence that they maintain already. I mean, having that physical network of stores all over the country, all over the world, that helps. You can leverage that. We see a lot of companies trying to do that ship-from-store, omnichannel type of strategy. Walmart can do that, they can build out these fulfillment centers or distribution centers in line with the physical presence they have all around the country, and the world, really. The investments have been made there. I mean, I think a lot of these investments they're going to make, they're going to be somewhat incremental, from the shipping and logistics side of things, the tech, making all of these things work together in harmony. It's obviously not an easy thing to do.
But I do think that ultimately, what this does, it puts the consumer in a really great position. Amazon, one thing that they've done very well is to breed a very loyal customer base through that Prime relationship. Now they're making bigger promises. They're telling you they're going to do things even better. If for some reason, they don't live up to that promise, now the consumer can say, "Amazon just screwed me here. They said they were going to get this thing to me next day and it wasn't next day. So you know what, I'm going to take my business over to Walmart, because there's another option now." I mean, really, there wasn't another option before. But now there is an option. That could be interesting to see.
Greer: OK, speaking of options, let's talk about it from the investor angle. When you look at this move by Walmart, and when you think about the next 10 years, do you think Walmart and Amazon can both be market-beating stocks? Is there room for both Walmart and Amazon to beat the market? Or do you essentially have to choose one?
Moser: I don't think you have to choose one. I think that they both serve their own roles in the world of commerce. I think they could serve their own roles in the portfolio as well. Walmart, clearly an older company. There's an argument to be made there from an income perspective. I mean, that's going to be a fairly steady, reliable dividend. They have a business model that can certainly afford it. Amazon obviously doesn't pay a dividend. But they've really focused on just investing that money back in the business. Perhaps there's still some growth to be had there as well.
I do feel like, part of me looks at Amazon and thinks, how much bigger can this thing really get? But when you consider the fact that Walmart has $500 billion-plus in annual sales, and Amazon is really about half of that, I think that answers the question there. So it seems to make sense to hang onto those Amazon shares. And I think that Walmart could serve as a nice little bit of a defensive play that works in tandem with that.