For the last decade or more, the promise of Amazon.com (AMZN +1.43%) for investors has been its potential to one day rival Wal-Mart (WMT +0.80%) as a global mass retailer. For those who got in anywhere near the ground floor, it was a great bet.
AMZN vs. WMT Market Cap, data by YCharts.
Whereas Wal-Mart's market capitalization has oscillated between $175 billion and $250 billion for most of the past 10 years, Amazon's market cap did not exceed $50 billion until late 2009, and was still below $100 billion at the beginning of last year.
Today, Amazon.com is much closer to catching Wal-Mart in terms of market cap. As of Friday morning, Amazon's market cap was $177 billion, roughly two-thirds of Wal-Mart's value. Yet in terms of revenue and profit, Amazon is still way behind. While I'm no fan of Wal-Mart stock, Amazon seems even less appealing today now that it's valued at nearly the same amount as Wal-Mart.
Watch the gap
Amazon.com is growing quickly, but it still has a long way to go to catch Wal-Mart. Last year, Wal-Mart generated revenue of $469 billion, more than seven times higher than Amazon's revenue of $61 billion. For next year, analysts expect Wal-Mart's revenue to reach $496 billion, while Amazon's will grow to $91.5 billion.
On a raw numbers basis, Amazon is not gaining ground very quickly. While 2013 is on track to be the first year in which Amazon actually adds more revenue than Wal-Mart, the company is expected to close the revenue gap by just $3.5 billion between 2013 and 2014 combined.
Looking at profitability, the gulf between Wal-Mart and Amazon is even wider. In each of the last three years, Wal-Mart has earned net income between $15 billion and $17 billion. By contrast, in 2010 -- its most profitable year ever -- Amazon earned net income of just $1.15 billion. Analysts currently expect Amazon's earnings to return to the $1 billion to $1.5 billion range next year following a three-year period of reduced earnings.
It's nice to have cash now
The bull case for Amazon.com rests upon the idea that it can continue growing revenue quickly for many more years, and that this will eventually lead to a higher profit margin. However, even if Amazon sustains a long-term double-digit revenue growth rate -- which would be challenging -- it will still take 15 to 20 years to reach Wal-Mart's current size. It will be even harder to reach parity with Wal-Mart (since Wal-Mart is likely to continue making gradual revenue gains).
As I have argued previously, Amazon.com is no more efficient than competitors like Wal-Mart. While it saves money by not operating stores, Amazon has to pay to run busy warehouses, and to ship goods directly to customers. Increasingly, it is also using services like Prime Instant Video as loss leaders to attract customers to the Amazon ecosystem. As a result, Amazon's long-term margins are likely to be fairly similar to Wal-Mart's.
Amazon doesn't have stores, but running warehouses, and shipping direct to consumers, is still costly.
Even if Amazon can eventually catch -- or even exceed -- Wal-Mart in terms of earnings, that doesn't mean that the company is worth as much as Wal-Mart today. While Amazon is busy reinvesting all of its meager profits to produce growth, Wal-Mart is generating a flood of cash that it can return to shareholders.
Wal-Mart currently pays more than $6 billion in dividends annually! Based on Wal-Mart's history of consistent dividend increases, it is likely to pay well over $100 billion in dividends before Amazon starts to rival it in terms of earnings (if that ever occurs). Wal-Mart is also buying back stock to gradually reduce its share count, whereas Amazon's share count has been increasing steadily.
Foolish bottom line
It's true that Amazon.com's dominance of e-commerce could make it the next Wal-Mart. Just five years ago, that was a great reason to invest in Amazon, as it could be bought for a fraction of the price of Wal-Mart.
Today, the situation is much different. Amazon is still worth slightly less than Wal-Mart, but the discount is pretty minimal considering that Wal-Mart is sending lots of cash back to shareholders, while Amazon needs to invest heavily to keep growing quickly. Unless you think that Amazon has a nearly infinite ceiling -- that it can one day be a multitrillion-dollar business -- Amazon stock does not look appetizing at all.
