Battle of the Stocks : Walmart vs Target and Microsoft vs Amazon

We continue the Battle of the Stocks this week with a new round of American names. With the holiday shopping season, we focus on retail with a bit of tech, in other words… Amazon. It’s hard to ignore the gorilla in the room, with Amazon dominating two spheres: retail and cloud computing.

Here are this week’s match-ups:

Walmart vs. Target

Walmart is the rare brick-and-mortar giant that has withstood the onslaught of Amazon. Though once-hated for wiping out mom-and-pop shops in Smalltown Main St. America, Walmart has, ironically, survived by adapting to e-commerce. Wisely, Walmart learned this lesson whereas other chains (Sears) failed and suffered.

No doubt, Walmart is directly competing with Amazon and its current battleground is groceries. By the end of this year, Walmart aims to have 1,600 stores for grocery delivery and 3,100 that offer grocery pickup.

Meanwhile, Walmart is expanding the quantity and selection of online products by partnering with brands like Lord & Taylor and Fanatics. Analysts including Teal Linde and Gordon Reid applaud these initiatives and expect continued growth for the big-box retailer.

Year-to-date, Walmart stock has slightly outpaced the wider indices by rising over 27%. It pays a sector average 1.79% dividend and trades just under a 24x PE. However, the valuation and single-digit growth rate give Stan Wong pause, who wonders how long Walmart can keep fighting Amazon.

Overlooked in the Walmart vs. Amazon war is Target. Canadians remember Target for its disastrous expansion into this country, which lost the retailer nearly US$1 billion by early 2014. The company arrogantly failed to understand this market.

It has taken a long time for Target to recover from that blunder, and it still lags behind Walmart in building its e-commerce operation. For this reason, analysts like Zachary Curry prefer Walmart.

So, Walmart is the winner, right? It will surprise many to read that Target‘s stock has outperformed Walmart‘s this year by more than three times at 88%, and is one of the leading stocks on the S&P for 2019. Its currently reaching all-time highs around $125-126. Also, Target trades at a lower 20x PE than Walmart and pays a higher 2.1% dividend yield. It’s beaten the street during its last five reports, and just two weeks ago raised its earnings guidance heading into the crucial holiday season. Onsite and e-sales grew 4.5% during Q3 compared with 2018, while Target‘s income rose nearly 15% for the same period.

The CEO credits a better shopping experience both in-store and online; Target has also expanded its toy selection to fill the gap with the store closures of Toys ‘R Us. Analyst Robert Lauzon says that Target is firing on all cylinders and it could catch up to Walmart to become a duopoly. That said, he still gives the edge to Walmart.

Winner: Walmart–but no longer by a country mile. Target is catching up and deserves to be on investors’ radars.

Microsoft vs. Amazon

Like Target, Microsoft is a comeback story and is currently touching all-time highs. While its operating system, Windows, still dominates PCs and non-Apple laptops, Microsoft has grown to become a cloud computing giant, so big that it controversially won the US$10 billion Pentagon deal.

Wall Street expected Amazon to claim that prize. The deal is so pivotal, so high-profile and huge, that Amazon is legally challenging that decision, citing political interference from Trump who openly feuds with Amazon CEO Jeff Bezos. Amazon will likely lose, and the deal with swell Microsoft‘s coffers, whose market cap tops US$1.155 trillion (with a T).

Earlier this year, Microsoft did the unthinkable and surpassed Amazon‘s cap which currently stands at less than US$900 billion. (FYI, Apple is worth US$1.2 trillion.)

Both stocks are Wall Street darlings, with analysts praising them. Folks like Brian Acker call Amazon the growth company, dominant in so many areas, starting in cloud where Amazon is number one, e-retailing of course, but also developing rapidly in groceries (threatening big box retailers), shipping (challenging FedEx and UPS), and streaming as it sells more Prime subscriptions (which tie into Amazon‘s one-day shipping program).

True, Amazon‘s PE sits at 80, but Bruce Murray is confident that the company’s strong cash flow will raise the stock price. However, Amazon is not a slam dunk. This year, analysts have sounded concerns. Stan Wong notes that the company’s earnings have declined lately as it pours US$1.5 billion in Q4 alone into one-day Prime shipping. Ross Healy feels that the FAANGs have had their day in the sun; Amazon‘s stock has slipped over 10% from its 2019 high made in early June.

Anti-trust threats from Washington continue, though Capitol Hill won’t break up the Bezos empire anytime soon. Looking long-term, though, contrarian investor Benj Gallander warns of a sharp fall, citing Amazon‘s book value of $107 at a fraction of its $1,800 share price.

In contrast, Microsoft is hitting grand slams, that rare bird that attracts unanimous buy signals from analysts. In recent years, Microsoft has re-positioned itself as the biggest cloud computing company only behind Amazon.

Before the Pentagon deal, MSFT‘s cloud growth was 65%. Further, David Fingold observes that the regular payments by clients for cloud services makes MSFT like a utility, enjoying a reliable stream of revenues. On top of that are the reliable sales from Windows OS. All this makes Microsoft a money-printing machine, says Brooke Thackray.

There’s so much cash that last September, Microsoft bumped up its dividend by 11% and announced it was buying back US$40 billion in shares. The only caveat is that Microsoft is selling at all-time highs around $152 (up from $144 just a month ago), so some analysts like Christine Poole call for investors to buy it on pullbacks.

Meanwhile, you’re paid a not-bad-for-a-tech-stock dividend of 1.54% at a PE of 28, a lot less than Amazon‘s.

Verdict: Microsoft. Disclosure, I own Microsoft, but I also shop at Amazon. Amazon is likely safe for the long term, but will likely fall further than Microsoft during a recession.