Walmart Vs. Amazon Stock: Which Is Best?

Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT) are two of America’s largest and most successful businesses. Both have also generated massive returns over time for shareholders willing to buy and hold.

 

As the stock market selloff of 2022 took hold, both Amazon and Walmart stand out as potential buys for investors looking for returns when the market recovers. But between Walmart vs Amazon stock, which is best?

 

Walmart is one of the few American business giants that has remained relatively stable in 2022. The stock is only down about 3 percent for the year, giving Walmart a significantly better year-to-date performance than the S&P 500. The question, though, is whether Walmart still has room to grow and raise its share price when the next bull market begins.

 

In the most recent quarter, Walmart’s revenue grew 8.4 percent year-over-year. This moderate but respectable growth demonstrates that Walmart’s longstanding ability to increase its sales is still in force.

 

The company has also ramped up its efforts in the eCommerce space, with online revenues growing 12 percent. While it is in no position to threaten Amazon in this arena, Walmart’s omnichannel strategy could make it more resilient than most legacy retailers to changes in consumer behavior.

Walmart’s Q2 earnings were also stronger than expected. The company posted $1.77 per share, $0.17 higher than the analyst consensus estimate. Earnings did not grow from the year-ago quarter but did manage to come in at just $0.01 per share lower than in Q2 2021.

 

Walmart’s 12-month price forecast stands at $151, up just 7.8 percent over its current price of $140.08.

 

Walmart does, however, pay a 1.6 percent dividend that somewhat bolsters this low projected return. The retail giant has been raising its dividend for 49 consecutive years and maintains a payout ratio under 50 percent.

 

As a result, investors can likely expect Walmart to continue paying quarterly distributions, even if macroeconomic conditions blunt its returns.

 

Walmart also appears to be a decent value at its current price point. The stock is priced at 23.8 times its earnings but delivers a respectable $10.38 of cash flow per share to compensate for this somewhat high multiple. Walmart is also priced at a ratio of just 0.64 to its sales.

 

Walmart has been somewhat insulated from the downward pressures on margins that have affected other large retailers this year. This is largely due to the company’s grocery and pharmacy business lines. This fact could make Walmart a less risky investment in the event of a recession in the coming months, as sales of essentials like food and medicine should remain largely unaffected.

 

Unlike Walmart, Amazon has been quite hard-hit by the economic slowdown of 2022. The stock has sold off nearly 30 percent, while the company has struggled to maintain its historically high growth rates.

 

Although Amazon has had a difficult time this year, its massive eCommerce platform and cloud computing presence continue to make it a potentially good long-term investment.

 

Amazon’s most recent quarter saw revenue growth of just 7 percent, with total sales reaching $121.2 billion. Earnings, however, were just $0.10 per share. The rather low reported earnings missed analyst expectations by $0.05 and represented a steep decline from Q2 2021’s $0.76 per share results.

While not very much lower than Walmart’s growth rate, Amazon’s revenue growth is the slowest it has been in two decades. With multiple quarters of single-digit growth, Amazon seems to be facing considerable headwinds from a slowing economy.

 

Cash flows were also a major problem for Amazon last quarter, with operating cash flow decreasing by 40 percent year-over-year and free cash flow reaching a concerning -$23.5 billion on a trailing 12-month basis.

 

Where Amazon does maintain a considerable edge over Walmart is innovation. In Q2, the company continued to pioneer its drone delivery service, which will be rolled out in select markets later this year.

 

The company also introduced new store analytics, created a plethora of entertainment titles and continued to expand the enterprise footprint of its Amazon Web Services business line.

 

In contrast to Walmart, Amazon is projected to rise from $120.58 to fair value of $165. This would represent a return of 36.8 percent, nearly five times what Walmart is expected to return in the next year.

 

It’s worth noting, however, that analysts are far more divided on Amazon’s short-term trajectory. The target prices offered by analysts range from a loss of nearly 30 percent to a gain of nearly 70 percent. With such widely varied price targets, investors should be cautious about attaching too much importance to the median projected price.

 

From a value perspective, Amazon appears to be a good deal weaker than Walmart. Amazon’s price-to-earnings ratio is over 680, while its price-to-earnings-growth ratio stands at over 30. This strongly suggests that Amazon is overpriced based on its near-term growth prospects. Of course, historically Amazon has been a poor bet on this metric alone as it’s generally been very elevated.

 

On the surface, Walmart seems to be the more attractive of the two companies right now.

 

With more stable growth and a less demanding valuation, the retailer stands a good chance of delivering relatively steady returns. Amazon certainly has the potential to generate higher returns, but its outsized valuation and slowing growth make it a riskier proposition.

 

Despite its challenges, though, there’s still also a great deal to like about Amazon. The company remains a dominant force in both eCommerce and cloud computing, giving it a standing competitive advantage. This market dominance could allow Amazon to return to higher prices and improve its valuation when another bull market begins.

 

Ultimately, Walmart and Amazon both have the potential to be good investments, albeit for two different types of investors. Walmart is likely a better fit for conservative investors who are comfortable with slow, steady growth and safe dividends. With its higher risks and rewards, Amazon will likely be more appealing to risk-tolerant growth investors.

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