Retail behemoths Amazon.com (NASDAQ:AMZN) and Walmart (NYSE:WMT) together produced more than three-quarters of a trillion dollars in revenue in their recently completed fiscal years.

But these giants attract different types of investors. Amazon appeals to growth investors, and they've enjoyed market-smashing returns. Walmart appeals to income-seeking value investors, and they've seen the company's dividend increase every year for decades.

But which is the better buy today? Both reported their holiday-season earnings in recent weeks, so it's a good time to take a look.

An airplane for Amazon Prime Air flies above a cloudy blue sky.

Image source: Amazon.com.

Recent results

Here's a look at a few key numbers from Amazon and Walmart's fourth quarters:

Company Revenue Change Operating Income Change
Amazon $87.4 billion 20.8% $3.9 billion 2.5%
Walmart $141.7 billion 2.1% $5.8 billion (3.7%)

Note: Walmart operating income is non-GAAP (adjusted) and on constant currency basis. Sources: Amazon and Walmart. 

Walmart's fourth quarter was "not our best," said CEO Doug McMillon. Revenue fell short of Wall Street estimates of $142.5 billion, and its non-GAAP (adjusted) earnings of $1.38 also missed analyst estimates of $1.43. McMillon noted strength in grocery sales but said there were a few weeks in December when Walmart's sales of toys, media and gaming, and apparel were short of expectations.

Amazon's fourth-quarter revenue beat Wall Street estimates of $86 billion. Its adjusted earnings per share of $6.47 crushed estimates of $4.03. Operating income was well ahead of the company's forecasted range of $1.8 billion to $2.9 billion as well. The 2.5% growth in operating income came despite an increase in expenses related to one-day delivery for Amazon Prime customers.

Amazon reported it now has more than 150 million Prime subscriptions, which not only generates revenue for the company but also insulates it from competition.

Advantage: Amazon.

Financial strength: Groceries, retail, and web services

Walmart's grocery business remains strong, and that's important because it's a foundation for the company's revenue. People buy groceries in a growing economy or a recession.

The company said its two-year stacked growth for same-store U.S. grocery sales was among the best it's had in 10 years. There are 3,200 U.S. stores with online grocery pickup, and 1,600 offer delivery. That helped the company grow fourth-quarter e-commerce revenue 35%. Full-year e-commerce growth was 37%, and the company forecasts 30% growth this year.

When a recession arrives (and that day will come), Walmart has proved it can hold up. In the depth of the Great Recession, the S&P 500 was down 54% while Walmart's price was virtually flat. (Amazon was down 35%.) Couple a recession-resistant business with a dividend that's increased 47 consecutive years (currently yielding 1.84%), and it's the kind of company that helps income investors sleep easy.

While Amazon may not be winning the grocery war, its revenue growth shows it's winning plenty of others and has advantages Walmart and other retailers can't match.

Amazon Web Services (AWS), the company's cloud computing division, produced $35 billion in 2019, doubling the total from two years earlier. And its 26% operating margin is much higher than Amazon's other segments. AWS accounted for only 12.5% of Amazon's 2019 total revenue, but it produced 63% percent of the company's operating income.

Advantage: Amazon.

Valuation

Here are a few key valuation metrics for the companies:

Company Trailing P/E Forward P/E P/S P/FCF
Amazon 86 49 3.5 46
Walmart 22 21 0.6 23

Sources: Yahoo! Finance and YCharts. P/E = price-to-earnings ratio; P/S = price-to-sales ratio; P/FCF = price-to-free-cash-flow ratio

Amazon is expensive by traditional metrics, and it almost always has been. Investors pay a premium for growth, and the company has rarely disappointed. Even now, as Amazon's market capitalization has soared to more than $1 trillion, the company is expected to grow revenue more than 19% this year.

Walmart looks far less expensive than Amazon, trading for valuations close to the S&P 500, which has a P/E of about 23.5 and forward P/E of about 19. But for Walmart's lower valuation, investors also get a lower growth rate. Analysts estimate earnings growth of 5.7% this year.

Advantage: Tie.

Final call

If you're seeking income, Walmart's steady dividend increases could be attractive; and with a payout ratio of 41%, the company likely will continue that long history of increases. Walmart produced $14.6 billion in free cash flow last year, and its strong position in grocery sales means the company should be a safe haven in an economic storm.

But if you can only choose one of the two, Amazon is the better pick in my opinion. In the last 20 years, CEO and founder Jeff Bezos has kept his company continually evolving. Substantial free cash flow ($25.8 billion last year) gives Bezos and his leadership team the flexibility to try new initiatives while building on current ones. And that could fuel growth for years.