(AMZN -0.44%) has at least three businesses under its roof. It started off as the king of internet commerce. Then the company created a whole new business line known as Amazon Web Services (AWS). And of course Amazon has been developing its media properties like music, video, and its Twitch platform. Its internet focus gives Amazon a lot of optionality.

Ulta Beauty (ULTA -1.53%) is a brick-and-mortar retailer. Despite this, it was a fast-rising retailing superstar for many years. The company operates over 1,200 beauty stores across the U.S. Ulta, unlike many of its retail peers, seemed impervious to internet rivals for a long time. Ulta offers many services to its customers that can't be replicated online. But COVID-19 forced many of Ulta's shops to temporarily shut down earlier this year. And the stock has been hammered.

Is now a good time to buy Ulta shares? Or is Amazon a safer pick with a larger upside? Let's find out.

keyboard with buttons for shopping cart, delivery truck, globe, and credit card.

Image source: Getty Images.

Amazon's stock

While Amazon is a $1.5 trillion company, consider the outlandish possibility that the market is undervaluing this business (again). Before you roll your eyes, consider how difficult it is to put a price tag on Amazon's various parts. Retail is a low-margin business, while AWS is a high margin business. So do we value Amazon like a retailer, or a tech company? 

Or consider Amazon Prime. Are the people who are sending money to Amazon every month subscribing to music and video downloads? Or are the Prime Subscribers paying for faster deliveries on the retail side? Or both?

Many retailers have loyalty programs. (Ulta Beauty has a loyalty program, Ultamate Rewards, with 19 million subscribers). And Amazon Prime is (arguably) a loyalty program. Maybe all of the consumer-facing aspects of Amazon's business should be thought of as part of its retail operation. But the key point to understand is how much optionality is here, and how that business can go in many new and wonderful directions. To give this business a multiple like it's a brick-and-mortar retailer is ridiculous.   

Last year Michael Olson, an analyst at Piper Jaffray, estimated that the market was giving Amazon retail a price-to-sales (P/S) ratio of 0.8, similar to brick-and-mortar retailers like Walmart or Costco. And yet Alibaba trades for nine times sales, while South American e-commerce star MercadoLibre is valued at an even loftier multiple of 17 times sales. 

Isn't it absurd to say that Amazon's retailing operations should be priced like it's an ordinary retailing super-store? E-commerce is far stronger than brick-and-mortar retail. And to dominate internet retail in the U.S. is no small thing. For instance, more than half of Amazon's gross merchandise value comes from third-party sellers. That sort of virtual business can't easily be replicated in brick-and-mortar commerce. Amazon is like a landlord who owns the most valuable retail property on the internet. 

When Olson said that Amazon would hit a $1.5 trillion valuation in two to three years, he really nailed it -- except that it happened in one year. Imagine a company with $322 billion in annual sales that is growing revenue at a 40% clip. That's Amazon right now.

Company P/S Ratio Revenue Growth (Last Quarter) Net Margin (TTM) (AMZN -0.44%) 4.7 40% 4.1%
Ulta Beauty (ULTA -1.53%) 2.1 (26%) 4.4%

Data source: Yahoo Finance. Chart by author. TTM = trailing 12 months)

Of course, COVID-19 played a part in Amazon's mammoth success last quarter. The coronavirus, bulk shopping for the basics, and subsequent stay-at-home orders are big reasons Amazon's growth spiked this year, and it's definitely why Ulta Beauty's revenues have been decimated. So maybe when we move past this health scare, Ulta Beauty will jump ahead?

Will beauty make a comeback?

Ulta's stock was a high flyer for many years. After bottoming out at $4.11 a share on March 6, 2009, the stock had a fantastic run-up over the next 10 years, hitting $313 on March 6, 2019. If you had invested $4,000 at the bottom, you would have had about $300,000 a decade later. Nice! 

Growth had slowed quite a bit for the beauty superstar even before COVID-19 hit. The company had an ugly 2019. You can see the damage in Ulta's three-year stock chart below. The stock has been dead money during that period. When we compare Ulta's return to how Amazon has been doing, it's like night and day.

AMZN Chart

Amazon vs. Ulta Beauty stock performance, data by YCharts.

Arguably this is a short-term outperformance by Amazon. If we look at a 10-year chart, it's a different story.  Amazon still outperforms overall. But from 2010 to 2017, Ulta Beauty was a better stock.

AMZN Chart

Amazon vs. Ulta Beauty stock performance, data by YCharts.

While of course the coronavirus is largely to blame for Ulta's under-performance in 2020, what about 2019? Why did sales become sluggish before the coronavirus hit? Maybe there are built-in limitations to brick-and-mortar beauty retail after all.      

While this health scare is a temporary setback for Ulta, it also confirms and escalates trends that have been happening for a couple of decades. There's a massive migration of retail into the internet domain. Consumers prefer its ease of use and optionality.   

Even Ulta Beauty has been acquiring tech start-ups to keep up. In 2018 the company acquired GlamST, to help its customers do virtual makeup trials on its Ulta Beauty app. This is an acknowledgment that the future of retail is digital

What's the stronger stock going forward?

While Ulta Beauty has been a rare superstar in the world of brick-and-mortar retail, over the next 10 years it is likely that Amazon will continue its dominance in the faster-growing world of internet commerce. And the company has so much diversification that it's entirely possible the stock will continue to surprise and surpass expectations. (And be rewarded with higher multiples.) While Ulta is likely to recover from the coronavirus scare, my money is on Amazon as the stronger buy over the next decade.