Amazon beats Wal-Mart as biggest retailer

26 Jul 2015 | Author: | No comments yet »

Amazon reports surprise Q2 profit; stocks up by 17%.

This week an important event happened on Wall Street. Amazon took the retail world by surprise last week, first by producing a quarterly profit, and then by briefly turning into the planet’s biggest retailer.Amazon shares surged almost 10 percent on Friday after the e-commerce powerhouse reported a surprise second-quarter profit and a better-than-expected 20 percent jump in revenue.

Factors that must be considered include cash flow and cash expenditures on improving and growing operations, assets, earnings potential and goodwill, which is that amorphous attribute that’s synonymous with a company’s reputation. The value of Amazon (~$248B) exceeded the value of Walmart (~$233B.) Given that Walmart is world’s largest retailer, it is pretty amazing that a company launched as an on-line bookseller by a former banker only 21 years ago could be worth more than what has long been retailing’s juggernaut.

Walmart, the ubiquitous American chain that Amazon overtook on the stock market, still has the edge when it comes to sales: quarterly revenue of $114bn from its bricks and mortar sprawl dwarfs the online firm’s turnover of $23.2bn. The sharp increase in shares brought Amazon’s market value to US$247.77 billion, more than its biggest rival, Wal-Mart, signaling a sea change in retailing. Those points were brought home by online retailer Amazon, which surprised analysts this week by posting $92 million in profit for the second quarter, which it doesn’t often do.

Amazon, which turned 20 on July 16, credited the profit to continued strength of its cloud-computing business and strong revenue growth both domestically and abroad. Nevertheless, enthusiastic investors sent the price of Amazon stock hurtling higher after Thursday’s results, in the hope that the 20-year-old online behemoth can capture even more of the online world. “It looks like they beat across every major revenue line,” said Colin Sebastian, an analyst at Baird. “That, along with the surprise profit beat, is icing on the cake, so to speak.” The share price move valued Amazon at more $250bn by Friday night – keeping it above Walmart’s market value of about $230bn, and making founder Jeff Bezos up to $7bn richer on paper, via his 18pc stake in the firm. Based in his garage in Seattle, Mr Bezos set up the company online in 1995 as a bookseller, with a basic website offering “one million titles, consistently low prices”. The company, with 11,767 stores worldwide, still has much higher sales, US$485.65 billion in the year ended Jan. 31, compared with Amazon’s US$89 billion in annual revenue last year.

That surpasses Walmart’s own valuation of $231 billion, even though Amazon’s total net sales of $88 billion for 2014 are a fraction of Walmart’s nearly $500 billion in sales for the its fiscal 2014. Seattle-based Amazon has held a long-time strategy of investing the money it earns back into the company, resulting in quarterly losses or thin profits. Finance and valuation experts say Amazon’s increasing valuation is as much based on potential for sales as anything else, while Walmart is facing realities as an older, more mature company facing potentially lackluster sales from the markets it has long dominated. “Valuations are in part predicated on future results and expectations of good future results,” says Mitchell D. In a call with analysts, new Amazon CFO Brian Olsavsky said the company would continue to look for ways to keep costs in check while at the same time investing in “things that we think are big and important.” Amazon got a boost in revenue from Amazon Web Services, a suite of products and services offered to businesses by way of the “cloud,” or remote servers that enable users to access applications on any machine with an Internet connection.

Weiss adds that Amazon, which has always been an online retailer, represents the overall direction of the retail market, which revolves around the Internet and, increasingly, mobile transactions. “There’s a whole question [as] to what extent the big box stores will become things of the past, if they are nothing more than showrooms,” Weiss says. The firm has made a pro-forma profit in 10 of the 12 years since its first earnings, but earnings have played second fiddle to Mr Bezos’s growth ambitions. He said a variety of Amazon’s units boosted results: its US$99 annual Prime membership, third-party sellers and its logistics and delivery capabilities. Certainly, Walmart has seen the future too, and has set up its own online store, including a product offering that competes with Amazon’s Prime service, which gives purchasers access to special deals and faster delivery times, as well as free shipping in exchange for an annual fee.

Amazon ploughs billions back into new projects, but despite its attempts to diversify, its profits also retain a traditional retailer’s dependence on seasonal spending sprees such as Christmas and Prime Day, a manufactured summer sales event held this month to drum up subscribers to its premium service. But it’s got a massive infrastructure of stores, warehouses, and products to maintain and manage, says Bruce Bingham, managing director of the strategic advisory Berkeley Research Group, and a valuation expert. The company won’t say how many Prime members it has, but it’s estimated to be as many as 40 million, and Prime members typically spend more than other shoppers. The Kindle, which first appeared in 2007, and the Fire, a belated and so far unsuccessful foray into smartphones in 2014, are among the few physical items on sale bearing the Amazon logo. That is more than 4 times the size of #2 CostCo, or #1 in France (#3 in world) Carrefour, or #1 in Germany (#4 in world) Schwarz, or #1 in U.K. (#5 in world) Tesco.

Walmart directly employes ~.5% of the entire USA population (about 1 in every 200 people work for Walmart.) And it is a given that nobody living in America is unaware of Walmart, and very, very few have never shopped there. In the three months ending June 30, Amazon’s net income was $92 million, or 19 cents per share, compared with a loss of $126 million, or 27 cents per share, a year earlier.

And this could have devastating consequences for WalMart, due to what economists call “marginal economics.” As a retailer, Walmart spends 75 cents out of every revenue dollar on the stuff it sells (cost of goods sold.) That leaves it a gross margin of 25 cents – or 25%. Separate financials figures for AWS have only been available since April, but the most recent stats show quarterly revenues up 81.5pc to $1.82bn, with margins of more than 21pc, as Amazon hosts the myriad businesses piling onto its home turf. Thus, the net profit margin before taxes is a mere 5% (Walmart has for years made about 5 cents on every $1 revenue.) But, as sales shift from brick-and-mortar to on-line, this threatens the revenue base. Amazon has not disclosed its subscriber numbers for Prime, but finance chief Brian Olsavsky told analysts last week that the service was adding customers at rates “higher than we’ve ever seen”, with the fastest growth coming from outside the United States. “In some ways, Amazon is among the simplest stories we cover because these two areas are far and above the key.

Last month Facebook became more highly valued than the world’s largest retailer, knocking it out of the top 10 list of the highest-valued companies in the Standard & Poor’s 500 index. And the key to understanding why this is deadly to Walmart and other big traditional retailers is understanding that all Amazon (and its on-line brethren) need to do is chip away at a few percentage points of the market.

What the marketplace looks for is that point at which the shift to on-line is dramatic enough to become a “tipping point” changing the industry economics. There will be a point when on-line retailers have enough share that suddenly the fixed cost heavy traditional retail business model is no longer supportable. Five years later, Apple is now worth double Microsoft – even though its earnings multiple (stock Price/Earnings) is only half (AAPL P/E = 14.4, MSFT = 31.) Apple’s revenues are double Microsoft’s, and Apple’s revenues/employee are $2.4million, 3 times Microsoft’s $731k.

While Microsoft has about doubled in value since the valuation pinnacle transferred to Apple, investors would have done better holding Apple stock as it has more than tripled. And if the multiple equalizes between the companies (Apple’s goes up, or Microsoft’s goes down,) which will happen at some point in the future, Apple investors will be 6 times better off than Microsoft’s. Learn more about my public speaking, Board involvement and growth consulting at www.AdamHartung.com, or connect with me on LinkedIn, Facebook and Twitter.

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