(NASDAQ:AMZN) and Walmart (NYSE:WMT) remain the two most prominent names in American retailing. One has built its fortune by leading on the e-commerce front. The other cultivated its dominance of traditional retail in the late 20th century by taking extreme discounting across the U.S. and, later, to many other countries.

Amazon has been getting into the brick-and-mortar retail segment in recent years, either buying out or opening new physical stores. In contrast, Walmart has returned to investing prominence by enhancing its online offerings and leveraging its physical store footprint to give customers an omnichannel experience. While these moves helped to boost both stocks, one must look at the businesses and the retail industry generally to find which one offers better potential returns going forward.

Comparing and contrasting the two businesses

Amazon and Walmart are not as similar as some might assume. For instance, they mostly operate on opposite ends of the retail spectrum. Walmart remains primarily focused on physical locations, while Amazon holds a predominantly online presence. Both companies have worked to become more focused on omnichannel, but the long-established core strengths remain.

A tiny shopping cart and delivery package on top of a laptop.

Image source: Getty Images.

Then there's the fact that, while Walmart derives almost all of its revenue and earnings from retail, Amazon has become a conglomerate with several non-retail revenue streams. From a revenue standpoint, Amazon looks primarily like a retailer. However, Amazon Web Services (AWS) accounts for a majority of the company's profit. Amazon earned $3.08 billion on $10.22 billion in revenue from AWS in the first quarter of 2020.

This compares favorably to its retail arm. In the same first quarter, Amazon made $914 million in operating income from $65.22 billion in retail sales. Not only does this contribute comparatively little to investor returns, but it also underperforms its retail archrival. In comparison, Walmart reported an operating income of $5.2 billion on $133.67 billion in sales revenue in the first quarter of fiscal 2021.

Despite Walmart's higher retail profit, the fact that Amazon generates more of its earnings outside of retailing gives the e-commerce giant more flexibility.

Advantage: Amazon.

Valuation and growth

Admittedly, the earnings multiple appears to heavily favor Walmart at first glance. Amazon trades at a forward price-to-earnings (P/E) ratio of 100, while Walmart sells for around 24.5 times forward earnings.

Moreover, while Amazon eschews dividends despite its $1.25 trillion market cap, Walmart stock offers a dividend yield of just under 1.8%. The payout, now at $2.16 per share for the year, has risen for 47 consecutive years. Additionally, for those who have owned Walmart stock since the mid-1980s, the annual dividend now approximates their split-adjusted buy price on Walmart stock.

Still, the financials do not make Walmart an obvious choice. Despite Walmart's lower P/E ratio and its payout, Amazon enjoys a considerable advantage in earnings increases. For Amazon, analysts forecast an average annual growth rate for the next five years at 34%. In contrast, they expect Walmart will increase its earnings by just over 5.6% per year over the same period. In other words, investors who pay just over four times the valuation for Amazon will receive more than six times as much growth.

Moreover, Amazon stock has significantly outperformed Walmart. Over the last five years, investors saw about 7.6 times as much growth in Amazon stock compared to that of Walmart. Given the growth predictions, that trend will likely continue. 

Advantage: Amazon.

WMT Chart

WMT data by YCharts

Amazon or Walmart?

For those investors who have held Walmart stock for decades, they should stay in Walmart and continue earning their massive dividend returns.

However, just about everybody else will likely fare better in Amazon stock. Amazon's profits continue to grow faster by several multiples. More importantly, it owns a massive stake in a non-retail business that accounts for most of the company's profits. Considering the low margins that come with retailing, this gives the e-commerce pioneer more flexibility.

Despite the significantly higher expense of Amazon stock, it stands as the stock poised to deliver most investors proportionally larger returns.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.