Walmart vs Amazon

MBA Case Study Competition 2016 Real Vision Investment Case Study

Walmart vs Amazon

Team Single Voice Brigham Young University

Matt Drage Chace Jones Holly Preslar

MBA Case Competition 2016 Real Vision Investment Case Study

Introduction The internet has initiated a transformation in the retail industry that is affecting nearly every segment of the market. Amazon has historically dominated the online retail space, but Walmart is far from becoming irrelevant. In fact, insights into the retail market have shown that it is Walmart, not Amazon that is better positioned to be successful in an online era. Though online e-commerce is important, what is essential is a company's ability to integrate online techniques with a physical presence to provide customers with an "omnichannel" experience. Companies that are able to combine both aspects of shopping into an intertwined experience are those that will ultimately provide the most value to investors. Walmart's impressive global presence, its understanding of core customers, and its ability to continually provide profits and dividends to shareholders secure its position as the better long-term investment in an internet age. Company Profiles Walmart was founded in 1962 based on a model of providing low prices, creating economies of scale, and minimizing operating costs. Walmart experienced almost immediate success ? by 1970 it became a publicly traded company and by 1990 had spread internationally. Brick and mortar retail operations have remained incredibly strong through the decades ? Walmart has an imposing physical presence (11,526 retail stores and 158 distribution centersi) and has continued to develop and maintain a significant competitive advantage through that physical footprint. Financially speaking the company has also had a long history of providing positive earnings and dividend returns with a YoY growth of 3% on its stock price from 2000 to 2014ii. was founded in 1994 by its current CEO, Jeff Bezos. It became publicly traded in 1997 and has experienced impressive growth in both revenue and stock price from 2000 to 2014. Despite this growth, however, Amazon has yet to be considered profitable due to extremely low

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MBA Case Competition 2016 Real Vision Investment Case Study

profit margins that consistently hover around zero. Observed growth in stock price cannot be related to current profitability, since profitability has historically been nonexistent, but instead is a result of analyst expectations that, due in part to Amazon's proven track record of innovation, Amazon will continue to have high revenue growth and will soon begin to generate a profit. Financial Analysis Since January 2015, both Walmart and Amazon have experienced significant changes in stock price impacting the overall market value of each company. Amazon's stock price has risen 112% YTD as of November 6, 2015 while Walmart's price has dropped 32%. Amazon's trailing P/E ratio is 945 while Walmart's is 12iii. Based on this information it would appear likely that each company is mispriced ? Amazon overvalued, and Walmart undervalued. Surprisingly the conclusion of the analyses below shows that each is reasonably priced in relation to peer companies based on projected growth and earnings expectations. We have compared both Walmart and Amazon market multiples to five of the best comparable companies (see Appendix A for tables). This analysis placed Walmart on the low end of both the EV/Sales and EV/EBITDA multiples, when compared directly with its most relevant peers, suggesting undervaluation. In Amazon's case, when compared to selected peers, it is reasonably priced when looking at EV/EBITDA and is undervalued when looking at EV/Sales. The EV/Sales analysis does not account for a company's ability to generate profit, and can be misleading in this case given Amazon's current lack of profits. Amazon may wrongly appear undervalued using this method since the majority of Amazon's peers have higher profit margins despite lower sales. In order to better understand the effect of profitability and growth on these valuations, we have taken a two-variable approach and charted both Walmart and Amazon with a larger pool of comparable companies in the graphs below. The first is a graph of Walmart's and its comparable

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MBA Case Competition 2016 Real Vision Investment Case Study

companies' Enterprise Value (EV) to trailing twelve months (TTM) sales ratio, plotted against its TTM EBITDA margin. This is a direct comparison between a company's ability to sell product and its ability to generate profit. Companies with higher sustainable margins should sell for a higher price per dollar of sales; by using two variables this approach offers a better benchmark than simply comparing Walmart's sales multiple to the average. Walmart is just below the trend line of its peers signifying a reasonable price point based on this method (see the orange data point).

Company Name Costco Wholesale Corporation Target Corp. Best Buy Co., Inc. PriceSmart Inc. METRO AG Wumart Stores Inc. Olympic Group Corporation Companhia Brasileira de Distribuicao Dollar General DG US Equity Dollar Tree Inc DLRT US Equity Wal-Mart

EBITDA Margin EV/Sales

4.1%

0.6x

10.0%

0.8x

5.4%

0.3x

6.5%

0.9x

3.5%

0.2x

3.7%

0.2x

2.4%

0.4x

5.7%

0.3x

11.3%

1.2x

13.6%

2.3x

7.3%

0.5x

Wal-Mart Comparables - EV/Sales to EBITDA Margin

2.50

2.00

1.50

1.00

0.50

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%

The second is a graph of Walmart's and its comparable companies' Enterprise Value (EV) to EBITDA ratio, plotted against its projected five year average analyst projected revenue growth provided by Bloomberg. This graph directly compares an ability to generate profit with an ability to grow. Companies with higher expected growth should sell for higher EBITDA multiples; again, by using two variables this approach is a much better method than simply comparing Walmart's EBITDA multiple to the average. Walmart is right on the trend line ? again signifying a reasonable price point (see the orange data point).

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Company Name Costco Wholesale Corporation Target Corp. Best Buy Co., Inc. PriceSmart Inc. METRO AG Wumart Stores Inc. Olympic Group Corporation Companhia Brasileira de Distribuicao Dollar General DG US Equity Dollar Tree Inc DLRT US Equity Wal-Mart

5 Yr Growth EV/EBITDA

7.8%

14.6x

1.8%

8.0x

1.5%

4.7x

9.3%

13.9x

9.2%

5.4x

8.0%

5.4x

15.8%

15.2x

14.8%

5.4x

9.0%

10.2x

26.2%

16.9x

2.2%

6.5x

MBA Case Competition 2016 Real Vision Investment Case Study

Wal-Mart Comparables - EV/EBITDA to 5 yr Growth

18.00

16.00

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.00%

5.00%

10.00% 15.00% 20.00%

25.00%

30.00%

To reiterate, both graphs demonstrate a comparison to peers that shows Walmart's reasonable price. We have performed this same analysis with Amazon and its comparable companies as shown in the two graphs below.

Company Name Alphabet Inc. eBay Inc. Facebook, Inc. Yahoo! Inc. Expedia Inc. Netflix, Inc. The Priceline Group Inc. Etsy, Inc. TripAdvisor Inc. MERCADOLIBRE INC ALIBABA GROUP HOLDING-SP ADR , Inc.

EBITDA Margin EV/Sales

32.5%

5.9x

29.9%

2.0x

43.5%

18.7x

12.9%

5.8x

13.9%

3.1x

5.8%

6.9x

37.2%

8.5x

6.7%

4.1x

28.2%

8.6x

30.9%

7.2x

36.3%

15.2x

7.6%

3.0x

Amazon Comparables - EV/Sales to EBITDA Margin

20.00 18.00 16.00 14.00 12.00 10.00

8.00 6.00 4.00 2.00

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Company Name Alphabet Inc. eBay Inc. Facebook, Inc. Yahoo! Inc. Expedia Inc. Netflix, Inc. The Priceline Group Inc. Etsy, Inc. TripAdvisor Inc. MERCADOLIBRE INC ALIBABA GROUP HOLDING-SP ADR , Inc.

5 Yr Growth EV/EBITDA

14.2%

18.7x

5.3%

7.3x

31.3%

42.8x

4.0%

60.6x

14.9%

27.2x

23.4%

120.2x

15.3%

22.8x

31.1%

224.3x

23.6%

34.0x

20.2%

23.4x

18.1%

45.8x

17.9%

42.5x

250.00

Amazon Comparables - EV/EBITDA to 5 yr Growth

200.00

150.00

100.00

50.00

-

0.0%

5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

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