10 Years Later…Walmart, or Amazon? - The Economist

10 Years Later...Walmart, or Amazon?

Prepared for The Economist Case Competition

Prepared by The Tulane Valuation Team:

Ryan Cohagen Kris Khalil

Ruiqing Zhang

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TABLE OF CONTENTS

Abstract ................................................................................................................................3 1. Recent Performance, News, Industry Overview..................................................................4 1.1. Amazon ................................................................................................................................4 1.1.1. Recent Performance .............................................................................................................4 1.1.2. Recent News ........................................................................................................................4 1.2. Walmart ................................................................................................................................5 1.2.1. Recent Performance .............................................................................................................5 1.2.2. Recent News ........................................................................................................................5 2. Valuation Comparison..........................................................................................................6 3. Changes WMT Must Make to Compete in the Internet Age ...............................................8 4. Converting AMZN Ubiquity to Profitability .......................................................................9 5. Does Profitability Matter?..................................................................................................10 5.1. Related Companies ............................................................................................................12 5.2. Institutional Ownership Stake............................................................................................13 6. Investment Rationale .........................................................................................................14 6.1. Rationale ............................................................................................................................14 6.2. Primary Long Strategy .......................................................................................................14 6.3. Leveraging Options............................................................................................................14 7. Sources ...............................................................................................................................16 8. Exhibits ..............................................................................................................................16

A. 3 Year Percentage Growth of Stock Price ....................................................................16 B. 10 year AMZN to DJIA % Change ..............................................................................16 C. 10 year WMT to DJIA % Change ................................................................................17 D. Pro Forma Financial Comparison ................................................................................17 E. Wal-Mart Discounted Cash Flow Valuation ................................................................17 F. Amazon Discounted Cash Flow Valuation ..................................................................18 G. Analyst Recommendation Trends ................................................................................18 H. Wal-Mart Multiple Valuation Model............................................................................18 I. Wal-Mart Month Covered Call Option Return Model.................................................19

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Abstract Wal-Mart has recently announced a period of earnings stagnation, thus changing the market's sentiment towards WMT from being a blue-chip growth play, to being a stalwart in the years to come. The market is also expressing its skepticism on a low cost brick-and-mortar retailer in an increasingly digitized world where companies like Amazon are drastically locking up market share. Moreover, people are becoming more willing to pay an extra price for a better experience and better food as is the case with Whole Foods Market. In our opinion, the recent decline in WMT share price is a huge overreaction, and should be exploited by any long-term investor. It has created a great opportunity for the patient value investor to buy a blue-chip industry leaded with a 3.3% dividend yield at a conservative price.

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10 Years Later...Walmart, or Amazon?

1. BUSINESS DESCRIPTIONS

1.1 Amazon (AMZN) , Inc. was founded in 1994 and is headquartered in Seattle, Washington.

Amazon operates internationally as an online retail giant. The company serves consumers through websites such as , amazon.ca, and .mx, which include merchandise and content purchased for resale from vendors and those offered by third-party sellers. In addition, the company serves developers and enterprises through Amazon Web Services that provides compute, storage, database, analytics, applications, and deployment services in start-ups, enterprises, government agencies, and academic institutions. Further, it manufactures and sells electronic devices and provides Kindle Direct Publishing. Additionally, the company offers Amazon Prime, an annual membership program, which provides free shipping of various items; access to instant streaming of movies and TV episodes; and access to books to borrow and read on a Kindle device, as well as provides publishing, digital content subscriptions, and advertising services; and co-branded credit card agreements.

1.2 Walmart (WMT) Wal-Mart Stores, Inc. was founded in 1945. The company was incorporated in Delaware

in 1969. Walmart operates brick-and-mortar retail stores in various formats worldwide, as well as an online retail store. The company's segments include Walmart U.S., Walmart International, and Sam's Club. experiences on average 60 million visits a month and offers access to approximately 8 million SKUs.

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Walmart U.S. does business in the following six strategic merchandise units, across various store formats, including supercenters, discount stores, Neighborhood Markets and other small store formats, as well as . The Walmart U.S. segment also offers financial services and related products, including money orders, prepaid cards, wire transfers, money transfers, check cashing, and bill payment. The company also markets lines of merchandise under its privatelabel store brands.

2. RECENT PERFORMANCE, NEWS, INDUSTRY OVERVIEW

2.1 Amazon i. Recent Market Performance

Amazon's stock has been skyrocketing over the most recent one year from $290.74 to $654.18. Amazon provided returns of 35% in 2013, a decrease of 1.2% in 2014, and 86% in 2015 YTD. AMZN has been one of the main hedge fund darlings in the market as of late, and analysts project no change in the near future. As seen in Appendix 2, AMZN is up 1,470% relative to the Dow Jones Industrial Average which is up 71% over the last 10 years. ii. Recent News

Amazon reported third-quarter earnings of 17 cents per share on $25.36 billion in revenue. Analysts expected Amazon to post a loss of 13 cents per share on $24.91 billion in revenue, according to a consensus estimate from Thomson Reuters. These positive results were driven by strength in Amazon Web Services and its Prime ecosystem. With the data center pricing environment becoming more rationalized, AWS could continue to drive near-term growth. As for the medium-term, AMZN's Prime ecosystem is continuing to gain steam with some estimated 60-80 million users globally, and the higher purchase frequency as well as larger order size from the Prime users will likely to be supportive of AMZN's fourth quarter numbers

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