How Amazon can be worth the same as Wal-Mart
Amazon.com stocks rocketed up 10 percent Friday after the company reported quarterly profits to the surprise of many analysts’ expectations. Amazon’s market value – the price if you wanted to buy the whole company – is nearly that of Wal-Mart, even though Wal-Mart makes 35 times the profit of Amazon today.
Investors, though, are betting on what happens tomorrow. Piper Jaffray analyst Gene Munster figures Amazon added 20 million Prime members this year; those are the website shopping addicts who pay $99 for a year’s free shipping and other perks.
“When you make that $100 investment annually into Prime, it changes how you behave online,” Munster says. “And it makes you think ‘I’ll check Amazon first’ because you’ve invested that into Amazon.”
Prime members buy three times as many goods as non-members, Munster says.
Wal-Mart has a free online shipping club too. But the expectations there are far different.
“Both Wal-Mart and Amazon are making major changes in their companies,” Brian Reynolds, chief market strategist at New Albion Partners, says. “But equity investors aren’t buying it from Wal-Mart. That stock is on the verge of a breakdown, while Amazon just had a breakout.”
Amazon stock does reflect sky-high expectations, but they’re somewhat proven expectations. Last quarter, the company went from losing to making money. And at this rate of growth, Amazon’s profits could eventually match those of Wal-Mart’s.
“Do I think 20 years from now it’s conceivable that Amazon could have as much or more earnings than Wal-Mart? Sure,” says former investment banker Michael Goldstein, who now teaches finance at Babson College. “Do I think that makes the two equally worth value now? Me personally? No. But it’s not nuts.”
He says Amazon is no pets.com, the firm that famously went bust in the 2000 bubble. Its business plan to sell dog food and other items online failed. Today, that same plan seems to be succeeding at Amazon.
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