In recent years, Walmart (NYSE:WMT) has aggressively expanded its e-commerce ecosystem to counter Amazon (NASDAQ:AMZN). The retailer beefed up its delivery and pick-up options, matched Amazon's prices, and acquired a long list of e-tailers.

On the surface, these efforts are moving the needle. Walmart's U.S. e-commerce revenue rose 40% last year, and the company expects 35% growth this year. For comparison, Amazon's North American revenue rose 33% last year.

A next-gen delivery truck from Walmart.

Image source: Walmart.

That progress is promising, but eMarketer still expects Walmart to only account for 5% of all U.S. e-commerce sales this year, compared to Amazon's 47% share. Walmart's e-commerce revenue also still accounts for a mid-single-digit percentage of its total revenue.

Walmart doesn't disclose the exact figures for its digital business, but it warned that its e-commerce losses would widen this year as it ramps up investments in infrastructure, new hires, online grocery initiatives, and its Store No. 8 incubator for next-gen ideas like VR and AR shopping.

A recent Recode report estimated that Walmart's U.S. e-commerce business could generate $21 billion to $22 billion in revenue this year, which would account for about 4% of its top line. However, it also estimated that the unit will lose over $1 billion -- a significant amount relative to the retailer's $7.2 billion in net income last year.

Why is Walmart's digital business losing so much cash?

Investors might assume that Walmart's efforts to match Amazon's prices and delivery options are causing the unit to rack up losses, but that's just part of the story. Another major issue is Walmart's $3.3 billion takeover of the e-commerce platform Jet.com in 2016.

After the acquisition Walmart appointed Jet founder and CEO Marc Lore to lead the retailer's digital turnaround efforts. Lore then expanded Walmart's digital reach with the acquisitions of smaller digital-only brands like menswear brand Bonobos, vintage clothing brand ModCloth, and women's plus-size brand Eloquii.

Those deals expanded Walmart's lineup of exclusive online merchandise, tapped into niche markets, and widened its digital moat against Amazon. However, those new units -- along with Jet.com -- remained unprofitable. Lore also only sold those niche clothing brands on Jet.com instead of Walmart.com, which was an odd strategy since Walmart's main site reached more shoppers than Jet.com.

Those inconsistent strategies are causing tensions between Lore and Walmart US CEO Greg Foran, according to Recode. Walmart recently cut its marketing spend for Jet and merged Jet's teams with Walmart's to streamline its e-commerce business. Walmart's management is also reportedly interested in divesting Modcloth and Bonobos to narrow its losses.

Lore also wants Walmart to open more dedicated fulfillment centers like Amazon to match the e-commerce giant's next-day delivery reach. Walmart only has about 20 fulfillment centers in the U.S., compared to 110 centers for Amazon. Foran, who reportedly opposes the idea, favors using the retailer's existing brick-and-mortar stores as pick-up and delivery points instead. In other words, Lore prefers to challenge Amazon with pricier initiatives, while Foran prefers to leverage Walmart's existing resources to expand its e-commerce presence.

Shoppers at Walmart on Black Friday.

Image source: Walmart.

But it's not just about the U.S. market

Walmart often highlights the growth of its U.S. e-commerce business, but that's only one part of its global e-commerce push, which includes significant investments in India and China -- which will likely exacerbate its total e-commerce losses for the foreseeable future.

In India, Walmart acquired e-commerce leader Flipkart for a whopping $16 billion last year. Flipkart, which is also unprofitable, weighed down Walmart's fiscal 2019 earnings and is expected to negatively impact its earnings again this year. However, giving up on Flipkart could allow Amazon, the other major e-commerce platform in India, to conquer the growing market.

Walmart's efforts in China include big investments in e-commerce giant JD.com (NASDAQ:JD) and its crowdsourced grocery delivery platform Dada-JD Daojia. It's unclear if these investments are profitable, but they're essential for expanding the digital reach of its 433 stores across the country. It also plans to spend $1.2 billion on building new distribution centers across China over the next two decades.

Walmart lacks two of Amazon's key strengths

Walmart is making solid progress in the e-commerce arms race against Amazon, but it lacks two key strengths. First, Amazon offsets the lower margins of its marketplace with the higher margin revenue from its cloud platform AWS (Amazon Web Services). Walmart's lack of a comparable high-margin business leaves it exposed to loss-leading strategies at Amazon.

Second, Amazon has over 100 million Prime members in the U.S. It locks in those users with discounts, free delivery options, and a myriad of digital perks. Walmart offers free next-day delivery for orders exceeding $35, as well as an unlimited grocery delivery service for $98 per year, but neither service offers as many perks as Prime.

In other words, Walmart investors should take the retailer's reports of e-commerce growth with a grain of salt. It's certainly making progress, but its ongoing losses will throttle its earnings growth for the foreseeable future.