WALMART VS AMAZON - The Economist
WALMART VS AMAZON
Economist 2016 Investment Case Competition
sponsored by RealVision
Abstract
Over the next 10 years Walmart stock will outperform Amazon because:
? Combining brick-and-mortar with e-commerce is a winning
strategy: Although the growth of e-commerce is impressive, brick-and-mortar
stores still account for 90% of retail revenues. Walmart is better positioned as an
omni-channel retailer given its global store network and strong online presence.
? Early entry in China will pay dividends as country¡¯s middle class booms: The
growth of the Chinese middle class will alter global consumption trends in the next
decade. Walmart has been laying the foundation to meet this demand and is
accelerating expansion in China.
? Earnings, not dreams, drive value: Walmart has proven it can deliver long-term
profitable growth. Comprehensive strategy and operational excellence will
continue to provide above average profitability.
? Strong balance sheet and robust free cash flow provide low cost capital to
support growth: Relatively low debt insulates Walmart from rising rates.
? Undervalued stock will provide most value to shareholders: Conservative DCF
model shows the market is significantly mispricing Walmart¡¯s stock.
Cole Buckley, Pete DeFina and Lindsay Root
Table of Contents
Walmart vs Amazon .................................................................................................................. 2
Industry Summary ...................................................................................................................... 2
Company Overviews.................................................................................................................. 3
Amazon .................................................................................................................................. 3
Walmart .................................................................................................................................. 4
Market Position & Analysis ....................................................................................................... 5
Walmart is positioned to become the leading omni-channel retailer ..................................... 5
Walmart is able to capture growth in Asian middle class ...................................................... 7
Walmart¡¯s global network provides competitive advantage .................................................. 9
Financial analysis ..................................................................................................................... 10
Walmart has above average profitability and a strong history of profitable growth............ 10
Walmart¡¯s conservative capital structure makes it easy to raise capital and reduces impact
of rising rates ........................................................................................................................ 11
Valuation .................................................................................................................................. 12
P/OIPS .................................................................................................................................. 12
Discounted Free Cash Flow ................................................................................................. 14
Conclusion ............................................................................................................................... 16
Works Cited ............................................................................................................................. 17
1
Walmart vs Amazon
Amazon and Walmart have become ubiquitous, household names in the US and for good
reason: both of these companies have revolutionized the way in which we shop. Amazon offers
a convenient experience, and an ever-expanding selection of products whereas Walmart has a
wide network of store locations and famously low prices. As investments, these companies
highlight the dichotomous nature of the retail industry ¨C brick-and-mortar vs e-commerce; high
growth vs steady growth; US vs International; actual vs market expectations. To coalesce these
stark differences, we will first summarize the industry and these companies, followed by an
analysis of market position and financials, and finally an analysis of the firm valuation, all of
which point to Walmart as the clear investment over the next 10 years.
Investment decision: Buy WMT
Industry Summary
For the ease of comparison, we¡¯ve grouped both Amazon and Walmart into retail, however,
the industry forces that drive each of these companies are distinctly different and the firm that
is best able to leverage these forces will ultimately make a better investment for the next 10
years.
2
Table 1: Industry Summary1
Industry
E-commerce and Online
Auctions in the US
Warehouse
Clubs &
Supercenters in
the US
Department Stores
in the US
Per capita disposable income
Number of mobile internet connections
Percentage of services conducted online
World price of crude oil
Key Drivers
Life cycle
stage:
Growth
Mature
Decline
Concentration
Level:
Low ¨C HHI 250
High ¨C HHI
5,000
High HHI 2,000
Technology
Change:
High
Medium
Medium
Barriers to
Entry:
Low
High
Medium
Threats
High reliance on shipping
companies (FedEx, UPS, etc.).
Gas stations
generate large
portion of
industry
revenue.
E-commerce sites
are better
positioned due to
low overhead
costs, offering
lower prices and
wider inventories.
Operating profits limited when
oil prices are high. Membership
(like Prime) limits ability to pass
higher costs onto customers.
Opportunities
Disposable income levels determine quantity and quality of online
purchases
Integrate in-store and online for personalized customer experience
Company Overviews
Amazon
, founded in 1994 by current CEO Jeff Bezos, is the largest internet-based retailed
in the US. They maintain three different operating segments: North America, International, and
1
(IBIS World, 2015)
3
Web Services. In Q2 of 2015, Amazon reported $23 billion in sales of which North America
represented 60%, International 32%, and Web Services 8%.2 Amazon currently sells over 300
million products in a variety of categories. Its retail operation encompasses many different
business models ¨C Amazon Retail, Amazon Marketplace, and Amazon Web Services. In
Amazon Retail, the company purchases and takes possession of inventory in which it stores in
one of its 743 distribution centers in the US. In Amazon Marketplace, third party sellers are
able to list items on Amazon¡¯s website and the seller pays a fee to Amazon. Amazon Web
Services is cloud-computing platform providing services like online storage and virtual
servers.4
Walmart
Walmart, founded in 1962 by Sam Walton, was the world¡¯s largest company by revenue5. Its
operating segments include Sam¡¯s Club, Walmart US, and International. In Q2 of 2015,
Walmart reported $119 billion in sales of which Walmart US represented 62%, International
26% and Sam¡¯s Club 12%.6 Sales are generated predominantly through one of its 11,526 stores
throughout the globe. Walmart also generates sales through its website , however
less than 3% of sales are generated online.7 Evolving to compete in the digital space, Walmart
is moving from a traditional brick-and-mortar retail store to an omni-channel model which
includes online sales.8
Table2: Selected Company Metrics9
Company Name
Employees
Shareholders
Walmart (WMT) Amazon (AMZN)
2.2 Million
154,000
250,000
2,744
2
(Amazon, 2015)
(MWPVL, 2015)
4 (Amazon, 2015)
5 (Fortune, 2015)
6
(Walmart, 2015)
7
(Forbes, 2015)
8
(Walmart, 2015)
9
(Mergent Online, 2015)
3
4
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