Amazon or Walmart: Which Stock is Better?

The holiday season is winding down and it’s been a pretty good one for retailers. According to Mastercard’s SpendingPulse survey, retail sales this year increased 3.1% compared to last year. Two of the largest retailers on the planet Amazon (NASDAQ:AMZN) and walmart (NYSE:WMT) has taken a divergent path in 2023, with shares of Amazon soaring about 83% this year, while Walmart has underperformed the market, up only about 11% year to date.

Which of these two retail giants is better to choose as we head into 2024?

Amazon has a significant advantage

Consumers have been resilient despite high inflation this year, and continued increases in consumer spending have played a major role in keeping the economy from falling into recession. However, Walmart predicted last November that holiday sales at its stores would be weaker than expected, and inventory plummeted.

For the current fiscal year, the retailer expects net sales to increase 5 to 5.5 percent and operating profit to increase 7 to 7.5 percent. Wal-Mart’s capital spending is expected to rise slightly, while adjusted earnings per share are expected to be between $6.40 and $6.48 per share. This also represents a 2-3% increase over the prior fiscal year’s adjusted EPS of $6.29.

Amazon was more optimistic, predicting that sales would rise 7% to 12% in the fourth quarter and operating profits would rise between $7 billion and $11 billion, up from $2.7 billion in the fourth quarter of 2022.

Although both companies are major retailers, Amazon has a huge advantage over Walmart in its Amazon Web Services business. AWS is the world’s largest cloud computing provider with 32% market share, ahead of Microsoft (NASDAQ:MSFT) at 22%. While competitors have been chipping away at market share, Amazon has maintained a significant lead, with net sales up 12% year-over-year in the most recent quarter.

Overall, Amazon generates most of its revenue from AWS. In the third quarter, $7 billion of Amazon’s $11.2 billion in operating profit was generated by AWS, which saw its operating profit increase 30% year-over-year. This segment is a huge revenue diversifier for Amazon that Walmart doesn’t have. So when the economy slows and consumer spending is sluggish, you can rely on AWS to provide support, as Amazon tends to perform well in most cycles.

Even in 2022, when Amazon’s overall operating profit declined sharply, AWS’ revenue increased nearly 20% year-over-year. In 2024, when interest rates are expected to drop, AWS must ease corporate budgets and support cloud business.

Walmart: Cheaper with dividends

One area where Walmart has an advantage over Amazon is valuation. Its price-to-earnings ratio (P/E) fell from 44 in January to 26, making it significantly cheaper than Amazon. Forward P/E is 22.

Amazon’s P/E is much higher at 80, but going forward the P/E will drop to a more reasonable 39. Nonetheless, its value is worth monitoring. If the economy slows and overvalued technology stocks correct, we could see some volatility in the first half of the year.

However, Amazon is expected to continue to see strong growth not only in its cloud business but also in its e-commerce platform. This is especially true in the second half of the year when inflation falls and interest rates fall.

One of Wal-Mart’s strengths is its dividend. We have increased dividends for 50 consecutive years, becoming the Dividend King. Some income investors may prefer Walmart because Amazon doesn’t pay a dividend, but its yield averages 1.46%.

Another advantage of Walmart is that, as a discount retailer, it tends to perform well even during market downturns. If the economy slows in 2024, especially in the first half of the year, cheaper Walmart stock will probably perform better.

Analysts rate both a buy, and consensus estimates suggest Amazon shares are expected to rise about 15% over the next year, while Walmart’s is expected to rise 13%. I think both are worthy options, but if I had to choose just one, I would choose Amazon because of the massive growth potential of its cloud business, even if there is some volatility.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.