There’s no bigger rivalry in retail Amazon (AMZN 1.71%) When walmart (WMT -1.38%)Both companies are the two largest companies by revenue in the country, and both are expected to exceed $500 billion in revenue this year.
As most investors know, Amazon has had market share over the years with Walmart, by far the best stock to own in the last decade. But that could change.
Recent guidance calls for the e-commerce giant to see fourth-quarter earnings increase by just 2% to 8%, unusually low for a growth stock. Adjusting for currency headwinds, the company expects earnings growth of 12.6% from his 6.6%, still a significant slowdown from his 15% growth recorded in the third quarter. Shares plummeted on the news.
On the earnings call, CFO Brian Olsavsky explained the headwinds the company faces, stating, “Massive inflation, higher fuel prices, and continued rise in energy costs as consumers value their purchasing power. These factors are impacting our sales growth.”
Consumers are saving to buy necessities. Here he is, Olsavsky tacitly admits, that arbitrary products make up the bulk of his Amazon sales. Most of its sales come from third-party marketplace sellers who tend to skew more toward discretionary items than products sold by Amazon itself.
With interest rates rising and the likelihood of a recession growing, consumers are responding by reducing their spending on Amazon.
Walmart’s hidden advantage
Unlike Amazon, Walmart does most of its business selling consumer staples, not consumer goods. Groceries make up the bulk of U.S. sales, and the store’s reputation for low prices is attractive to customers looking to save money during tough times. Grocery strengths help drive visits to stores where consumers are more likely to purchase other items they need.
Walmart has yet to report third quarter earnings. But while the company has struggled with rising inventory levels and rising costs this year, it certainly won’t experience the kind of slowdown in sales growth that plagues Amazon.
Management said the company sees the recession as an opportunity to gain market share, demonstrating Walmart’s strengths as a low-cost leader.
Amazon’s growth rate is slowing, but it has high-growth businesses like cloud computing and advertising that Walmart doesn’t, so it could show even bigger growth in the fourth quarter.
But with stock prices higher than expected, Walmart appears to be gearing up for a recessionary holiday season.
What it means for Amazon
In preparation for slowing sales growth, Amazon is implementing a number of cost-cutting measures. This includes a hiring freeze for the corporate, retail, and AWS segments. It also means closing warehouses, canceling projects, and closing underperforming businesses like Amazon Care.
The stock has fallen almost 50% from its peak last year as growth slowed and earnings fell. While the business is likely to struggle over the next few quarters and the stock could hit a recession, a sale is a good long-term buying opportunity for a company that can return to profitable growth.
But Walmart’s focus on consumer essentials like groceries and its reputation for low prices make it look like a winner throughout the holiday season and into next year if a recession hits.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has a position at Amazon. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool’s U.S. headquarters has a disclosure policy.