Perhaps you have heard of the new concept being tested by Amazon, where you walk into their grocery store, select all your items, and then walk out without “checking out”. As you leave, their technology scans all your items and then immediately takes it from your Amazon balance or credit card. This was their apparent strategy when they make the eyebrow raising acquisition of Whole Foods.
Amazon has certainly been an innovator and industry disrupter over the years, first focusing on books (essentially putting brick and mortar book stores like Barnes & Nobel out of business, or forcing them consolidate/go niche), then more general items (pressuring small brink and mortar retailers). Of course, Amazon Web Services have been taking over the cloud industry as well. This latest move and testing to innovate the grocery industry certainly appears ready to solve one of the biggest complaints from shoppers – LINES.
From an investment standpoint, Amazon has been a homerun for those who have held the last 5 years with a return of over 400%. The stock has soared as revenues have grown, and it is the 4th most valuable company in the world, based on market capitalization. Revenues reached over $150 Billion in 2017.
Honestly, I have a hard time getting excited about investing in Amazon, as the valuation and financial ratios do not make sense to my “accountant brain”. Many of my retirement mutual funds hold Amazon, but when it comes to buying individual stocks, I have stayed away (which was not a great move in hindsight).
On the opposite side, I own Walmart as an individual stock position. I can’t seem to make the Amazon investment make sense when comparing it to Walmart. For example, Walmart’s revenues are 3 times higher than Amazons ($490B for WMT vs $160B for AMZN), but Walmart’s market cap is less than half of Amazon’s (WMT $315B vs AMZN $659B). Also, they are both profiting around $4 per share, but Amazon’s share price is 10x higher (AMZN pps of $1,365 vs WMT pps of $106), so the Earnings Per Share (“EPS”) ratio is completely out of whack for Amazon at 350, when a normal company trades at an EPS ratio of 15-20. Since Amazon has only recently become profitable and is still trying to grow, they do not pay any dividends, while Walmart has a dividend yield of 1.95%.
Yes, I understand Amazon is still growing and innovating, while Walmart’s future is not as rosy (though not bad with expanding online services and acquisitions). I just can’t get my head around the valuation or financial ratios, and I feel that if revenues were to flatten or outlook/sentiment was to turn, the risk for a huge loss is there, as the company is so highly valued already.
Do you agree with me, or am I crazy for staying away?
I should also say congratulations to those who have been holders for a while... well done!
Brian