Walmart and Amazon in Light of Walmart's Earnings Miss

For the first time in a long time, shares of Walmart (WMT) took a big hit on earnings yesterday. The stock dropped nearly ten percent as the retail giant announced a bottom-line miss, with EPS of $1.33, four cents below the consensus $1.37 estimate from Wall Street analysts.

The main problem that the market perceived in the report was a slower than expected growth rate in online sales, which presumably is good news for Walmart’s rival Amazon (AMZN). That prompts the question of whether investors should be buying WMT at this discounted price, or AMZN on the further evidence of their dominance.

The answer is both, but for different reasons and with different time horizons and strategies.

The logic behind buying WMT at these levels is simple: the reaction to earnings was clearly overdone. A four cent miss on inflated expectations after ten straight quarters of beats certainly doesn’t warrant a ten percent drop, particularly when it comes on revenue that was higher than expected.

It is a classic case of a company becoming a victim of its own success. Over the last couple of years, as retailers in general have been under enormous pressure, Walmart has been a standout, with CEO Doug McMillon’s focus on cleaning up, both in terms of physically improving the stores and in terms of the company’s reputation paying off. At the same time, McMillon has increased the company’s online presence as a direct response to Amazon.

Sooner or later the law of large numbers had to come into play. Percentage increases get harder to achieve as the numbers get bigger, so matching, or even getting close to, the fifty percent growth in online business that we saw last quarter was always going to be tough. Still, the market, spoiled by a long run of beats of growing expectations, was expecting another blowout.

The numbers were disappointing for sure, but the size of the drop in the stock is more to do with market positioning and expectations than the report itself, and a quick bounce can be expected. WMT may yet decline a little further as positions are unwound and we fill the gap created by Q3 earnings in November, but buying in the 90-95 range in anticipation of a return to 100+ is a logical trade. However, taking at least some profit if we get there would make sense until the long-term picture is clearer.

AMZN, on the other hand, is still a buy or hold for the long term. As I have said before, one of the most impressive things about Amazon is that they have shown an ability to turn on the cash tap when they want to, as demonstrated by their massive beat of expectations contained in their own Q4 earnings. That means that in their case the market will probably not punish the stock in a big way if they miss at some point in the future.

Given the huge sales of the Echo and Echo Dot over the holidays, though, even that looks unlikely. Those sales are not profit generators, but every one increases the reach of the Amazon ecosystem, and that bodes well for future performance.

I have been a fan of WMT as a long-term buy for a while, but these earnings change the game. One shouldn’t read too much into one earnings report, and it could be that they are just a one-off. Until the picture is clearer, however, a short-term trade of the bounce is more appealing than a long-term commitment, and even long-term positions should be trimmed if we get back above $100.

These numbers also show that taking on Amazon head on is still a major problem, even for competitors with a logical plan to compete and good execution, so AMZN remains a long-term buy, even at these levels.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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