Wal-Mart … or “The Wal-Mart of the Web”?

Submitted by Sizemore Investment Letter as part of our contributors program

Though it has been derisively been called “the river of no returns,” Amazon.com (Nasdaq:$AMZN) can call “scoreboard” on its critics.  Amazon is the last man standing of the generation of companies that rose to prominence during the 1990s tech boom.

Sure, plenty of the dot-com darlings are still alive and well and generating more revenue than at any time in their histories.  Microsoft (Nasdaq:$MSFT) and Cisco (Nasdaq:$CSCO) quickly come to mind.  But most have had reputational hiccups in the 13 years that have passed since the Nasdaq’s peak, and Amazon is the only one to see its stock surpass its old 2000 highs.

Note: Apple (Nasdaq:$AAPL) and Google (Nasdaq:$GOOG) don’t count; Apple was an also-ran in the 1990s that reinvented itself in the mid-2000s and Google was not publically traded at the time.

Thirteen years after dot com went dot bomb, Qualcom(Nasdaq:$QCOM) is close to break even.  But Microsoft, Cisco and Intel (Nasdaq:$INTC) all trade for less than half their old highs and all trade at very modest multiples of earning—9-13 times expected earnings for the coming year.

Yet Amazon is up 300% and trades for a very dot-com-like 72 times expected earnings.  And this for a company with the skimpiest returns of the whole lot.   Mass-market retailing tends to be a low-margin business, but Amazon’s are razor thin even by retailer standards…as in barely existent at all.  This past quarter Amazon earned 22 cents per share…for a stock worth $265 per share at time of writing.  For the full year 2012, Amazon actually lost money.

What gives?

Investors are willing to give Amazon a free pass on low profitability because the company is growing its top-line sales by more than 20% per year and they see it as being the Wal-Mart (NYSE:$WMT) of the web.  And, so the thinking goes, once the company has achieved its scale objectives, it can stop investing so heavily in new infrastructure.  The savings will flow through to the bottom line, and investors will finally get the rewards they’ve been waiting for.

Maybe.  But let’s see how the “Wal-Mart of the web” compares to the original Wal-Mart.

Looking at the numbers, it’s hard to make a compelling case for Amazon.  It’s four times as expensive as Wal-Mart measured by price/sales and nearly six times as expensive based on forward price/earnings.  And again, this is Wal-Mart—the largest and most successful retailer in the world.

To be fair, Amazon has certain assets that Wal-Mart does not have and likely never will.  Wal-Mart has nothing that can compare with the Kindle, for example.

Sure, Wal-Mart sells e-readers, and until recently the behemoth of Bentonville sold Amazon’s Kindle.  But that’s not the point.  As an inventory item in its own right, the Kindle isn’t worth much.  Amazon is willing to virtually give it because it knows the real goldmine is in selling the e-books.  The Kindle itself is little more than a facilitator, and Wal-Mart has no answer to Amazon’s e-book downloading service—which grew by 70% last year.

In the same light, Wal-Mart likewise has nothing to rival Apple’s iTunes; it discontinued its music downloading service in 2011.

Still, Wal-Mart has gone head-to-head with Apple, Amazon, and Netflix (Nasdaq:$NFLX) with its Vudu high-definition video streaming service, which has one of the largest movie and TV catalogues available.

Wal-Mart may or may not beat Amazon in the video streaming contest.  But if I were an Amazon shareholder, I would have much bigger concerns—such as Wal-Mart’s expanded presence online at walmart.com, Wal-Mart’s enormous logistical infrastructure and its ability to offer free shipping to any of its stores, and—perhaps scariest of all—the move by states to tax internet commerce.

Remember, in high-sales-tax states like California and Texas, online retailers had an enormous advantage over their brick-and-mortar rivals.  Their prices were 8% lower from the get go due to the lack of sales tax levied.  Alas, those days are over.  States have become more stringent in their definitions of what qualifies as having a physical presence on their turf.  Amazon now collects sales taxes in 8 states, and the rest will not be far behind.

None of this takes away from what Amazon has accomplished.  It is a wonderful company and a pioneer in internet commerce.  It’s a disruptor that almost singlehandedly put Borders Books out of business and remade the publishing industry in its own image.  I love the company and admire its founder, Jeff Bezos.

But I hate the stock.

At current prices, it is a terrible investment.  To pay 70 times earnings for a $129 billion company is ludicrous, and investors who buy at these levels are no less likely to get hammered than the investors in other great bubble stocks.

My recommendation?  Buy Wal-Mart.  And if you want to make a pair trade out of it, short Amazon.

Disclosures: Sizemore Capital is long WMT. This article first appeared on InvestorPlace.

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