The Internet is the future. Or at least it used to be. Today, the new shine of Internet shopping is gradually wearing off as it becomes part of the norm, particularly in developed markets.
While holiday sales season has shifted towards online retailers, overall retail sales are still dominated by brick and mortar retailers. More importantly for investors, online retailers have razor thin margins, undifferentiated from their physical peers. As a result, the excitement of internet retailing of the past 2 decades has given way to prudence.
One illustration of this shift in bias is a chart of the WMT / AMZN stock ratio over the past 5 years:
The ratio is actually flat since mid-2011. That’s in contrast to the decade-long move in AMZN’s favor from 2001 to 2011.
From a fundamental perspective, we’ve made no secret of our distaste for AMZN as an investment. The risks seem skewed to the downside considering the company’s persistently thin margins. Some will argue that it’s a way for the company to avoid taxes, or that it’s long-term investment that will come back in spades, but as investors, we prefer the simpler Jerry Maguire philosophy of, Show Me the Money! In that regard, WMT’s consistently growing sales and profits (albeit single digit pace) are likely to be preferred going forward, particularly if we see a drop in overall risk appetite in the coming year.
To be clear, I don’t have a bullish view on WMT after the stock has rallied 20% in 6 weeks. However, I do remain bearish on AMZN, and wanted to point out that the relative weakness of the largest internet retailer vs. the largest brick and mortar retailer might indicate a longer-term fundamental shift in retail investing.