While it might seem like e-commerce and brick-and-mortar retail are heading in different directions, e-commerce titan Amazon (AMZN 2.49%) and brick-and-mortar stalwart Walmart (WMT 1.45%) have both enjoyed unprecedented business results in 2020. Therefore, it's not surprising both stocks are beating the market average this year.
To be clear at the outset, with Amazon the third-most-valuable publicly traded company in the world, I would never actively bet against it. But recent moves make Walmart the stock I'd be more interested in buying today if forced to choose between the two.
Did this just change the game for Walmart?
With over 11,000 locations, a Walmart is usually not very far away. This makes it a consistently convenient option even if it's not consumers' favorite place to shop (I wonder how many people would say they actually enjoy shopping there if surveyed). The company is often the punch line in jokes. But considering Walmart has generated over $500 billion in trailing-12-month revenue, this business is no laughing matter.
Here's something we don't have to wonder about because a survey's already been conducted: Market researcher Piplsay found 11% of Americans signed up for Walmart's new subscription service in the first two weeks it was available. The subscription service is called Walmart+ and provides perks like free shipping and discounts on fuel.
However, only about half of people in the survey had even heard of Walmart+ when the survey was conducted. This means about 25% of people who had heard of Walmart's new service immediately thought it was worth it. Moreover, roughly half of people who have heard of Walmart+ but haven't subscribed yet are thinking about subscribing soon.
To me, Walmart was already cemented as a brick-and-mortar chain not in danger of going anywhere: There are things we just need at a good price, and Walmart conveniently has them. But by launching Walmart+, the company is taking an important step to stop the ceding of market share to e-commerce competitors. Indeed, in Piplsay's survey, 19% of people had already canceled Amazon Prime because of Walmart+.
At around $100 per year, Walmart+ won't meaningfully boost revenue. Even 100 million subscribers would result in $10 billion in revenue, less than 2% of its current revenue. But a subscription service does make the company more relevant than ever. Expect it to be a focal point when it reports quarterly earnings on Nov. 17.
What Amazon still has going for it
I'm not suggesting Walmart+ will be an Amazon killer. It merely prevents Amazon from becoming a Walmart killer with its aggressive physical real-estate expansion. Consider that in the third quarter, Amazon announced 100,000 new full-time jobs mostly to staff 100 new facilities. You don't hire that many people without expecting a big uptick in business.
Yet this is costly to do. As my fellow Motley Fool contributor James Brumley pointed out in a recent article, the cost to fulfill orders for Amazon is growing faster than sales. The company wants the sales, but it's forced to keep building out the infrastructure to handle its record volume. This is an advantage for Walmart. It has a much easier path to same-day shipping, with Walmart+ using the real estate it already owns.
That said, Amazon Web Services (AWS) continues to provide the profitable growth investors crave. Through the first nine months of 2020, AWS has supplied just 12.5% of total net sales. But AWS net sales are up 30% from the same period in 2019, and this business segment has supplied 62% of Amazon's operating income. In short, AWS is a powerful asset and continues to grow at an impressive pace.
The price tag
As some of the largest large-cap stocks around, Walmart and Amazon aren't companies I'm personally interested in buying today. As we saw with Walmart+, even a runaway success would struggle to move the revenue-growth needle: It gets harder the bigger these companies get. I don't believe the businesses are doomed; I just question how many years of market-beating performance they can provide.
But there's an additional hindrance to Amazon beating the market, at least in the short term. Over the past five years, the stock has mostly traded with a price-to-sales ratio of three to four. It's currently approaching a P/S ratio of five. I expect the valuation to trend toward a more-historical norm eventually, potentially causing the stock to underperform the market.
Walmart is also trading at a relatively high valuation compared to its five-year norms, so the same valuation risk applies. But if a Walmart investment today lags the market in the short term, at least investors are collecting a dividend that yields 1.5% while waiting for the stock to beat the market.