This E-Commerce Giant Is A Better Pick Over Walgreens Stock

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We believe Amazon stock  (NASDAQ: AMZN) is currently a better pick than Walgreens stock (NYSE: WBA), given its better prospects. Although Walgreens is trading at a comparatively lower valuation of 0.3x trailing revenues than 2.5x for Amazon, this gap in the valuation is justified given Amazon’s superior revenue growth, profitability, and lower financial risk, as discussed below.

If we look at stock returns, AMZN, with a 29% fall this year, has fared better than a 36% decline for WBA stock, but both have underperformed the broader S&P 500 index, down 22%. There is more to the comparison, and in the sections below, we discuss why we believe AMZN stock will offer better returns than WBA stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Walgreens vs. AmazonWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Amazon’s Revenue Growth Is Better

  • Amazon’s revenue growth of 9.6% over the last twelve months is much better than -0.3% for Walgreens.
  • Even if we look at a longer time frame, Walgreens saw its sales rise at an average annual growth rate of 4.4% to $112.0 billion in 2021, compared to $98.4 billion in 2018, while Amazon’s sales rose at an average growth rate of 26.6% to $469.8 billion in 2021, compared to $232.9 billion in 2018.
  • Walgreens’ revenue growth over the recent years was driven by increased demand for Covid-19 testing and vaccine administration. Now that the economies have opened up, the company will see a lower contribution from the Covid-19 testing and vaccine administration. However, it also means a rise in footfall at its stores and continued expansion of its online healthcare platform (Find Care).
  • Amazon’s revenue growth over the recent years was driven by shelter-in-place restrictions and the spread of the Covid-19 virus, resulting in e-commerce growth. However, this trend is now cooling off, reflecting lower revenue growth rates and delivery volumes.
  • However, Amazon has more revenue streams, including online and physical stores, third-party seller services, subscription services, advertising services, and amazon web services (AWS).
  • Our Walgreens Revenue and Amazon Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Amazon’s revenue growth over the next three years is expected to be better than Walgreens’. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 1.6% for Walgreens, compared to a 16.2% CAGR for Amazon, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Amazon Is More Profitable, And Comes With Lower Risk

  • Amazon’s operating margin of 3.6% over the last twelve-month period is slightly better than 3.4% for Walgreens.
  • This compares with a 5.8% operating margin for both Walgreens and Amazon in 2019, before the pandemic.
  • Amazon’s free cash flow margin of 7.3% is better than 4.4% for Walgreens.
  • Our Walgreens Operating Income and Amazon Operating Income dashboards have more details.
  • Looking at financial risk, Amazon is better placed among the two. Its debt as a percentage of equity of 4.9% is much lower than 46.3% for Walgreens, while its 14.5% cash as a percentage of assets is higher than the 4.8% for the latter, implying that Amazon has a better debt position and has more cash cushion.

3. The Net of It All

  • We see that Amazon has demonstrated better revenue growth, is more profitable, and comes with lower financial risk, given its better debt position and more cash cushion. On the other hand, Walgreens is trading at a comparatively lower valuation.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Amazon is currently the better choice, despite it being the more expensive of the two.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 4% for Walgreens over this period and a 73% expected return for Amazon stock, implying that investors will likely be better off buying AMZN over WBA, based on Trefis Machine Learning analysis – Walgreens vs. Amazon – which also provides more details on how we arrive at these numbers.

While AMZN may outperform WBA, it is helpful to see how Walgreens’ Peers fares on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Target vs. Amerco.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Sep 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
WBA Return -5% -36% -60%
AMZN Return -7% -29% 215%
S&P 500 Return -6% -22% 66%
Trefis Multi-Strategy Portfolio -9% -23% 203%

[1] Month-to-date and year-to-date as of 9/29/2022
[2] Cumulative total returns since the end of 2016

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