The holiday season is winding down, and it was a pretty good one for retailers. According to Mastercard’s SpendingPulse survey, retail sales were up 3.1% this year compared to last year. The two biggest retailers on the planet, Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT), have taken divergent paths in 2023, as Amazon’s stock has soared some 83% this year, while Walmart has underperformed the market, up by only about 11% year to date.
Heading into 2024, which of these two retail behemoths is the better buy?
Amazon has a key advantage
Consumers have been resilient this year in the face of high inflation, and consistently rising consumer spending played a large part in keeping the economy from dipping into recession. However, Walmart predicted in November that holiday sales at its stores would be weaker than anticipated, and its stock plummeted.
For this full fiscal year, the retailer projected a net sales increase of 5% to 5.5% with a 7% to 7.5% increase in operating income. Walmart’s capital expenditures are expected to be flat to up slightly, while its adjusted earnings per share is projected between $6.40 and $6.48 per share. That would also be up 2% to 3% from the adjusted EPS of $6.29 in the previous fiscal year.
For its fourth quarter, Amazon was more optimistic, as it projected revenue growth of 7% to 12% and operating income somewhere between $7 billion and $11 billion, up from just $2.7 billion in the fourth quarter of 2022.
While both companies are major retailers, Amazon has one huge advantage over Walmart in its Amazon Web Services business. AWS is the largest cloud-computing provider in the world with a 32% market share, ahead of Microsoft (NASDAQ:MSFT) at 22%. While competitors have eaten into its market share a bit, Amazon has maintained a significant lead, watching its net sales increase 12% year over year in the most recent quarter.
Overall, Amazon generates most of its income from AWS. In the third quarter, $7 billion of Amazon’s $11.2 billion in operating income came from AWS, which saw its operating income increase 30% year over year. The segment is a huge revenue diversifier for Amazon that Walmart does not have. Thus, if the economy slows and consumer spending lags, Amazon can rely on AWS to provide support, as it tends to perform well in most cycles.
Even in 2022, when Amazon’s overall operating income dropped sharply, AWS saw its income jump nearly 20% year over year. In 2024 with interest rates expected to drop, AWS should help loosen up corporate budgets and support the cloud business.
Walmart: Cheaper with a dividend
One area where Walmart has an advantage over Amazon is its valuation. It is much cheaper than Amazon with a price-to-earnings (P/E) ratio of 26, down from 44 in January. Its forward P/E is 22.
Amazon’s P/E is significantly higher at 80, but its forward P/E drops to a more reasonable 39. Still, that valuation is worth monitoring. It could lead to some volatility in the early half of the year if the economy sputters and overpriced tech stocks correct.
However, Amazon should see continued robust growth led by its cloud business but also from its e-commerce platform, particularly in the back half of the year as inflation drops and interest rates come down.
One advantage that Walmart has is its dividend, which it has increased for 50 years in a row, making it a Dividend King. Amazon does not have a dividend, so some income investors may favor Walmart, although its yield is pretty average at 1.46%.
Another advantage for Walmart is that, as a discount retailer, it tends to outperform during market downturns. If the economy slows in 2024, especially in the first half, the cheaper Walmart stock will probably outperform.
Analysts rate them both as buys, with Amazon stock projected to increase about 15% next year and Walmart expected to rise 13% based on consensus estimates. I think they are both worthy options, but if I had to choose one, I’d go with Amazon because of the massive growth potential of its cloud business — even if there is some volatility.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
