Amazon (NASDAQ: AMZN) produced two major surprises with its second quarter earnings announcement — a quarterly profit and a new status as the world's largest retailer, as measured by market capitalization.
Analysts had expected the notoriously profit-averse Amazon to post a loss of 15 cents per share, but instead were greeted by a 19-cent per share profit of $92 million on a 20% revenue increase to $23.2 billion. The subsequent stock surge that day pushed Amazon's stock up to lofty heights, creating a market capitalization of approximately $249 billion — topping the nearly $231 billion value of Walmart (NYSE:WMT).
As of this writing, that gap still holds, with a bit over $248 billion for Amazon and just below $230 billion for Walmart. Neither is approaching the market cap of Apple (NASDAQ:AAPL) of almost $704 billion, but Amazon is now in eleventh place in overall market value on the S&P 500 list, just behind JP Morgan Chase (NYSE:JPM) at $251.8 billion. (For reference, Walmart is twelfth on the S&P 500 list.)
In terms of sales, Walmart surpasses Amazon by far. Over the past year, Walmart raked in $485.5 billion in revenue — over five times more than the $95.8 billion revenue of Amazon in the same timeframe. In that case, why is Amazon so highly valued? Growth potential.
Amazon has been growing steadily, while Walmart is trying to stay afloat amid intense competition. The retail corporation is caught in the classic battle of online vs. brick-and-mortar shopping platforms. In spite of the fact that there are Walmarts and their offspring on nearly every corner, the retailer’s online presence is lagging behind many modern consumers’ needs.
Amazon came out swinging at Walmart recently by offering large discounts for Amazon Prime customers on "Prime Day," July 15th, which was listed as having "more deals than Black Friday." Online shoppers reported some disappointment with Prime Day, due to wait lists, sellouts, and selection concerns, but shoppers still purchased 34.4 million items that day. Walmart countered with its own classic "rollbacks", which will continue for up to 90 days while stocks last.
It may not be fair to compare Amazon to Walmart in the near future, because a major component of Amazon's growth was in their online services branch. The simply named Amazon Web Services, which offers cloud computing and business storage options, racked up an 81% increase in sales to $1.8 billion — less than 8% of the total, but in a niche that offers much greater growth potential than retail.
This growth potential has investors excited about Amazon at the moment. Amazon's habit of pumping its revenue back into the company for sometimes non-core purposes has always frustrated profit-seeking investors, but those investors are hoping the second quarter results reflect a shift to a more profit-oriented approach. As Michael Pachter of Wedbush Securities put it, "The takeaway is that Amazon can control spending whenever it feels like it, and it has shown that it is willing to do so."
Investors in Amazon are paying a mighty steep price for that expectation of growth, though. Amazon stock topped $578 per share for an all-time high, before settling down to the $525-$530 range, which is still an impressive surge over the $480 per share range of a few days prior. According to CNN Money, Amazon stock is trading around 200 times the 2016 earnings estimates (P/E ratios are hard to compare with sporadic profits). Compare that to Walmart's measly trading of 14 times earnings.
The real question raised by Amazon’s recent earnings report is whether future growth is more important than current profits. It seems as though investors have voted with their dollars in a big way.