MW Amazon's stock is cheap relative to Walmart's. Why investors are making a mistake in their flight to safety.

By Laila Maidan

Amazon and Walmart could be great stocks to weather an economic slowdown - except one is trading at a premium while the other is at a discount

When money is tight, consumers cut back on spending, unless it's for necessities like groceries and household goods. Investors follow that shift too, by shedding their exposure to consumer discretionary and moving to consumer staples, where big retailers like Walmart Inc. and Amazon.com Inc. are beneficiaries.

You can say that the two companies will continue to go head-to-head in a bid for consumers hunting for bargains. But each company has its own set of strengths, with an obvious one being that Amazon.com $(AMZN)$ is an innovative company that's a big play on artificial intelligence, including through its cloud business. That means Amazon's stock has traded like its Big Tech peers - for better or for worse - and that advantage has played against it recently.

Over the past couple of years, investors had been willing to pay big bucks for AI stocks with the promise of hefty future earnings potential. But as recessionary fears grow, investors are now looking for stocks that do well when the economy slows, and Walmart $(WMT)$ has traditionally been one of those brands.

Meanwhile, Amazon has been tossed out with its tech peers, a move that's a mistake - but an opportunity for those who catch it.

"It all depends on how you classify Amazon, which I think investors generally lump in with tech and not with consumer defensives, consumer cyclicals," said Dan Romanoff, a Morningstar senior analyst. "And so Walmart is seen as kind of this safe retailer that is not immune to a recession but just insulated from one."

Amazon's stock is down by almost 20% this year, which has made it cheap on the basis of its forward price-to-earnings ratio, which stands at about 25. The P/E multiple measures how much investors pay per share for every dollar the company earns. Walmart's stock is up by 6% this year, bringing its forward P/E near 34, making it a more expensive stock.

The comparison of the two P/E ratios matters when considering historical context: Since 2005, the average forward P/E for Walmart's stock has been about 18, and for Amazon's stock about 93, according to data compiled from FactSet. This means that the former is expensive relative to where it normally trades and the latter is quite cheap. Morningstar's equity analyst Noah Rohr estimates that a fair P/E for Walmart shares would be closer to 22 or 23.

Below is a chart that shows the historical next-12-months P/E of Amazon's stock in blue and Walmart's in green. While Walmart's has traded at a steady ratio, investor optimism for Amazon sent its P/E spiking to extremes of 900 in 2015. That year, Amazon's sales were growing while the company was spending heavily on things like the AWS cloud-computing business, drone delivery and streaming. Investors discounted that positively and it paid off as earnings per share grew from just 6 cents in 2015 to $2.09 in 2020.

Recently, Amazon's P/E has compressed mainly as a result of its falling stock price because EPS estimates have not shifted much, Romanoff noted. Amazon's EPS is expected to increase to $6.24 in 2025 and $7.47 in 2026, compared with $5.53 in 2024, according to FactSet data.

In comparison, Walmart doesn't have the same earnings growth expectations. Analysts tracked by FactSet expect $2.61 in adjusted earnings per share for fiscal year 2026, which ends in January 2026, and $2.93 for fiscal year 2027. That would be up just slightly from $2.51 in fiscal year 2025.

Here's the hiccup with Amazon though: It has been heavily investing to build out data centers, and that spending has crunched profit margins, according to Romanoff. There's skepticism around whether the company will be able to get a return on those investments since generative-AI demand isn't where it needs to be right now. But the Morningstar analyst is expecting Amazon's data-center utilization to hit full capacity immediately because the company's capabilities are already stretched.

Meanwhile, Amazon's e-commerce business has the deepest moat on the internet with help from its leading fulfillment capabilities, fast delivery services and advertising revenue, according to Bernstein analysts in a research note.

All this doesn't mean Walmart should be left in the dust. The stock has its advantages. Walmart makes 60% of its sales from groceries, a steady source with not a lot of variability, Rohr said.

The brick-and-mortar retailer is also ramping up its digital footprint, with its e-commerce business growing at over 20% annually. Bernstein analysts expect a double-digit compound annual growth rate for this segment. And Bernstein sees further opportunities in Walmart's ability to expand its profit margins by reducing its delivery and fulfillment costs through automation.

To close off the debate between these two brands, we can look at Wall Street's overall consensus price targets for each of the stocks. Amazon's average price target is at $215, and 93% of the 74 analysts polled by FactSet have bullish ratings. As of Tuesday, the stock was trading near $173, implying potential upside of about 24%.

In comparison, Walmart's price target is at around $107, and 86% of the 43 analysts have bullish ratings. On Tuesday, the stock was trading near $95, implying potential upside of about 12.6%.

As a caveat to these targets, it's important to note that Morningstar's price targets for these names, which take into consideration fundamental and quantitative factors, and the volatility of each stock, sit at $240 for Amazon and $63 for Walmart, representing 39% upside and 37% downside, respectively.

Overall, investors would need to weigh the pros and cons of each company by considering whether much of the optimism for Walmart has been priced in or whether they're willing to ride out macroeconomic uncertainty in Amazon's stock.

-Laila Maidan

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April 22, 2025 15:45 ET (19:45 GMT)

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