As far as Wall Street is concerned, surging Amazon (AMZN) is in the penthouse and stagnant Walmart (WMT) is in the doghouse. That situation doesn't look like it will change anytime soon -- even though Walmart, the world's largest retailer, is far more profitable.
Indeed, on paper Walmart would seem to be the better bet. Amazon, which was founded in 1994, has struggled throughout its history with profitability. It finished in the red on a net income basis in two of its past four quarters, earning $306 million over those four quarters, while Walmart's net income totaled some $15.5 billion for the same period.
However, Amazon, which reports its next quarterly results Oct. 22, is North America's largest e-commerce company, with $79.5 billion in sales in 2014, dwarfing third-ranked Walmart, which had $12.1 billion in online sales, and Apple (AAPL), which was second with $20.6 billion, according to InternetRetailer.com.
Shares of Seattle-based Amazon have also been on a tear, gaining more than 80 percent since the start of the year. Walmart recently issued disappointing earnings guidance, which only added to its stock price plunge, now down nearly 32 percent since January.
Although Walmart has struggled to boost growth in its U.S. operation, it earns plenty of money. In the chain's latest quarter, net income was $3.47 billion, and its profit margins were 2.89 percent, far better than Amazon's net income of $92 million and profit margins of 0.4 percent.
Stock prices, however, are also based on a company's perceived growth potential, and in that case, Amazon appears to offer more potential upside. Its revenue is expected to surge by more than 20 percent over the next two quarters, while Walmart's is expected to be little changed. That difference is part of the reason in their stock price divergence. Amazon closed Friday at $570.76, while Walmart ended at $58.87.
"At the moment, (Amazon) is on top of the world," wrote Sucharita Mulpuru-Kodali, an analyst with Forrester Research, in an email. "But everything ultimately gets saturated. They make no profit in their core retail business and probably never will (though their 3rd party marketplace distorts that somewhat as it is wildly profitable)."
In an effort to catch up to Amazon and other rivals, Walmart is ratcheting up spending on its e-commerce business by $2 billion over the next two years, investing in areas such as new fulfillment centers and plans for a mobile app along with improvements in customer service.
But Amazon has many advantages over traditional retailers like Walmart, which have to maintain physical stores. Amazon can also count on Amazon Web Services (AWS), its fast-growing cloud-computing business and Amazon Prime, its $99-per-year membership service that offers free two-day shipping, access to exclusive content such as the Emmy-award winning comedy "Transparent" and other perks.
Wall Street was pleased last quarter when Amazon broke out the results of AWS for the first time. Operating income in the business was $391 million versus $77 million in the year-earlier period, and analysts expect that pace to continue. AWS' success gives Amazon more flexibility to compete against rivals like Walmart on price.
"AWS is more profitable than what people thought," said Gene Munster, an analyst with Piper Jaffray, who rates Amazon stock as "'overweight," in an interview. "The benefit is that AWS can fund its own growth and fund part of the retail growth."
Wedbush Securities analyst Michael Pachter, who rates Amazon's shares as "outperform," expects "dramatic growth" at AWS in coming years. He also forecasts that Amazon's spending on original video content may hit $3 billion this year.
That lack of a cash machine to fund future expansion underscores the huge challenge a traditional retailer such as Walmart faces in competing against a fast-moving digital rival such as Amazon.