10 Years Later…Walmart, or Amazon?
Prepared for
The Economist Case Competition
Prepared by
The Tulane Valuation Team:
Ryan Cohagen
Kris Khalil
Ruiqing Zhang
2
TABLE OF CONTENTS
1.
1.1.
1.1.1.
1.1.2.
1.2.
1.2.1.
1.2.2.
2.
3.
4.
5.
5.1.
5.2.
6.
6.1.
6.2.
6.3.
7.
8.
Abstract ................................................................................................................................3
Recent Performance, News, Industry Overview ..................................................................4
Amazon ................................................................................................................................4
Recent Performance .............................................................................................................4
Recent News ........................................................................................................................4
Walmart ................................................................................................................................5
Recent Performance .............................................................................................................5
Recent News ........................................................................................................................5
Valuation Comparison ..........................................................................................................6
Changes WMT Must Make to Compete in the Internet Age ...............................................8
Converting AMZN Ubiquity to Profitability .......................................................................9
Does Profitability Matter?..................................................................................................10
Related Companies ............................................................................................................12
Institutional Ownership Stake ............................................................................................13
Investment Rationale .........................................................................................................14
Rationale ............................................................................................................................14
Primary Long Strategy .......................................................................................................14
Leveraging Options............................................................................................................14
Sources ...............................................................................................................................16
Exhibits ..............................................................................................................................16
A. 3 Year Percentage Growth of Stock Price ....................................................................16
B. 10 year AMZN to DJIA % Change ..............................................................................16
C. 10 year WMT to DJIA % Change ................................................................................17
D. Pro Forma Financial Comparison ................................................................................17
E. Wal-Mart Discounted Cash Flow Valuation ................................................................17
F. Amazon Discounted Cash Flow Valuation ..................................................................18
G. Analyst Recommendation Trends ................................................................................18
H. Wal-Mart Multiple Valuation Model............................................................................18
I. Wal-Mart Month Covered Call Option Return Model .................................................19
3
Abstract
Wal-Mart has recently announced a period of earnings stagnation, thus changing the
market's sentiment towards WMT from being a blue-chip growth play, to being a stalwart in the
years to come. The market is also expressing its skepticism on a low cost brick-and-mortar
retailer in an increasingly digitized world where companies like Amazon are drastically locking
up market share. Moreover, people are becoming more willing to pay an extra price for a better
experience and better food as is the case with Whole Foods Market.
In our opinion, the recent decline in WMT share price is a huge overreaction, and should
be exploited by any long-term investor. It has created a great opportunity for the patient value
investor to buy a blue-chip industry leaded with a 3.3% dividend yield at a conservative price.
4
10 Years Later…Walmart, or Amazon?
1. BUSINESS DESCRIPTIONS
1.1 Amazon (AMZN)
Amazon.com, Inc. was founded in 1994 and is headquartered in Seattle, Washington.
Amazon operates internationally as an online retail giant. The company serves consumers
through websites such as amazon.com, amazon.ca, and amazon.com.mx, which include
merchandise and content purchased for resale from vendors and those offered by third-party
sellers. In addition, the company serves developers and enterprises through Amazon Web
Services that provides compute, storage, database, analytics, applications, and deployment
services in start-ups, enterprises, government agencies, and academic institutions. Further, it
manufactures and sells electronic devices and provides Kindle Direct Publishing. Additionally,
the company offers Amazon Prime, an annual membership program, which provides free
shipping of various items; access to instant streaming of movies and TV episodes; and access to
books to borrow and read on a Kindle device, as well as provides publishing, digital content
subscriptions, and advertising services; and co-branded credit card agreements.
1.2 Walmart (WMT) Wal-Mart Stores, Inc. was founded in 1945. The company was incorporated in Delaware
in 1969. Walmart operates brick-and-mortar retail stores in various formats worldwide, as well
as an online retail store. The company’s segments include Walmart U.S., Walmart International,
and Sam's Club. Walmart.com experiences on average 60 million visits a month and offers
access to approximately 8 million SKUs.
5
Walmart U.S. does business in the following six strategic merchandise units, across various store
formats, including supercenters, discount stores, Neighborhood Markets and other small store
formats, as well as walmart.com. The Walmart U.S. segment also offers financial services and
related products, including money orders, prepaid cards, wire transfers, money transfers, check
cashing, and bill payment. The company also markets lines of merchandise under its privatelabel store brands.
2. RECENT PERFORMANCE, NEWS, INDUSTRY OVERVIEW
2.1 Amazon
i.
Recent Market Performance
Amazon’s stock has been skyrocketing over the most recent one year from $290.74 to
$654.18. Amazon provided returns of 35% in 2013, a decrease of 1.2% in 2014, and 86% in
2015 YTD. AMZN has been one of the main hedge fund darlings in the market as of late, and
analysts project no change in the near future. As seen in Appendix 2, AMZN is up 1,470%
relative to the Dow Jones Industrial Average which is up 71% over the last 10 years.
ii.
Recent News
Amazon reported third-quarter earnings of 17 cents per share on $25.36 billion in
revenue. Analysts expected Amazon to post a loss of 13 cents per share on $24.91 billion in
revenue, according to a consensus estimate from Thomson Reuters. These positive results were
driven by strength in Amazon Web Services and its Prime ecosystem. With the data center
pricing environment becoming more rationalized, AWS could continue to drive near-term
growth. As for the medium-term, AMZN's Prime ecosystem is continuing to gain steam with
some estimated 60-80 million users globally, and the higher purchase frequency as well as larger
order size from the Prime users will likely to be supportive of AMZN's fourth quarter numbers
6
during the upcoming holiday season. The Company’s strong outlook suggests that near-term
strengths in ecommerce and AWS are sustainable.
It's worth noting that AMZN's success is partially driven by the strength of its ‘members’,
a model that is also adopted by Alibaba, with its focus on mobile payment, media, quick delivery
and internet finance, which is one of the reasons behind its competitive position in China. In
terms of competitive outlook, we expect AMZN to remain the dominant leader in North America
in the medium term. However, the long-term outlook could be less optimistic given the increased
focus BABA has on the US market. The recent partnership of BABA and the US Postal Office
and the ramp up of its data centers are all good indicators that BABA is building its
infrastructure in the US, and this will eventually compete head-on against AMZN.
2.2 Wal-Mart
i.
Recent Performance
Wal-Mart’s stock has been on the decline over the last year, with analysts predicting no
foreseeable changes in the near future. WMT has provided returns of 9% in 2013, 17% in 2014,
and decrease of 30% in 2015 YTD, as seen in Appendix 3, WMT is up 21% relative to the
Dow Jones Industrial Average which is up 71% over the last 10 years.
ii.
Recent News
Wal-Mart posted 2nd quarter earnings of $1.08 per share, down from $1.21 a share in the
year-earlier period. Revenue edged up to $120.2 billion from $120.13 billion a year
ago. Analysts expected earnings of $1.12 a share on $119.72 billion in revenue, according to a
consensus estimate from Thomson Reuters. Wal-Mart’s stock price took a beating after they
provided recent negative guidance on EPS at their recent stockholder meeting.
7
Wal-Mart said its profits were being weighed down by a decision to increase the hours of
store greeters and stocking positions, part of its push to improve customer service. We believe
that the recent plunge in the market value of Wal-Mart is a great opportunity for the long-term
investor to buy a supreme heavyweight at a value price. Below are a few key reasons why WalMart’s stock has lost so much value recently and why we feel it is a great long-term buy:

The fierce battle with Amazon and other retailers has forced WMT to increase
investments in its online shop. Noted in their most recent 8-K filing, in 2017 WMT will
invest approximately $1 billion in its online store. We actually see this as a long-term
positive for WMT, as they are currently well-behind Amazon in online retail sales.

WMT also has committed to investing substantial capital in improving its stores, making
way for an improved customer experience, increased trips to the stores, and longer time
spent at the stores.

WMT will increase wages going forward for its employees, resulting in higher costs for
the Company. WMT has been heavily criticized in the past for its compensation policies
& treatment of employees. In the current fiscal year, the average hourly wage will be
increased to $9, and then $10 in 2017. This increase alone will result in extra costs of
$1.2B in 2016 and $1.5B in 2017. This wage will constitutes 75% of the announced EPS
reduction.
Again, this is where ‘bad news” for short-term investors can turn out to be fantastic news
for long-term investors. With lower employee turnover and increased motivation through higher
wages, WMT is seeking to improve the customer experience and long-term profitability as well.
The employee turnover in US retail is currently 5% per month - a very high turnover which in
turn gives WMT a lot of problems.
8
3. PRO-FORMA AND VALUATION COMPARISON
3.1 Market share in ten years is the foundation behind our valuation assumption
In our DCF valuation model, we assume that, in ten years, both companies can keep their
current growth pattern for five years and then turn to stable. behind the assumption, we expect
that Walmart will be successfully adapt its operation model with internet retail era and defend
their current market share, in other words, Walmart can successfully extend their maturity stage
but not enter declining stage, and that amazon will successfully implement its strategy,
sacrificing current profitability, investing in growth, and earn long-term profitability, in other
words, Amazon will be able to successfully compete in market share expansion, enter the
maturity stage of internet retail model and successfully become one of the industry leaders.
3.2 Investor’s expectation of the future growth rate led to different P/E ratio
Amazon has a high P/E ratio, which is 944.66x on Nov. 8, 2015, while Walmart P/E ratio
is 12.27x. Different P/E ratios are result from investor’s different expectations onto the growth
rates of both companies. Prices of both companies have big differences with the result of our
DCF model. For Walmart, our target price $286.9, which is 4.92 times of current market price:
$ 58.37. For Amazon, the price we turned out is $447.35, which is 67.85% of current market
price: $659.37. By comparison, we conclude that market expect amazon will have higher than
current growth rate, and Walmart will have lower than current growth rate.
3.3 Pro-forma financial performance comparison
In order to make both companies’ future financial performances are comparable,
eliminate our team’s biased preference onto each of companies, and based on our fundamental
market share assumption, we projected the financial statements from Q4 2015 through 2025 in
9
three stages: First, forecast period through 2020; second, stable growth period from 2021 to
2015; third, terminal period 2016 and after.
3.4 Discounted Cash Flow Valuation
Based on the same assumption of 2.34% risk free rate and 5.92% of market risk premium,
we Utilize current WACC of 10.96% for Amazon and 4.69% for Walmart and arrive at a
valuation both companies using the perpetuity growth method. The value of Walmart we arrived
is $286.9, and the value of Amazon we arrived is $447.35.
4. CHANGES WMT MUST MAKE TO COMPETE IN THE INTERNET AGE
Wal-Mart is currently at a disadvantage in regards to its competitive position against
online retailers in an economy that is increasingly reliant upon the internet. We feel as though
the Company recognizes this fact, and is taking steps to make improvements (see the $1Bn
investment in online retail noted above). Yet, it may not be enough if WMT does not move
quickly and seek to challenge web behemoths such as AMZN and BABA by implementing one
or more of the following strategies:

Increase foot traffic in-store - Walmart saw foot traffic in U.S. stores fall for about a year
before trending back up during the most recent holiday shopping season. As of the third
quarter, foot traffic was up about 1% in U.S. stores. While WMT seeks to grow its online
retail business, they must seek ways to leverage their brick-and-mortar operations. WMT
may accomplish this goal through unique user-experiences for customers.

Increase employee engagement with customers - As WMT increases wages for workers,
the retailer must re-define what it means to be an employee of the store. One way WMT
will be able to compete is by face-to-face interaction with customers. Employees must
10
turn from shelf-stockers into sales-people and become more knowledgeable about the
products and services WMT offers.

Implement new technology to satisfy customers’ instant gratification needs - One of the
reasons AMZN is winning the online retail war, is that they make it very easy for a
customer to order a product and get it delivered ASAP (sometimes even the same day).
Amazon is currently opening hundreds of Amazon Locker locations around the country,
and WMT must counter this activity with innovations of their own. Whether WMT does
this through drone deliveries (WMT recently filed with the FAA for this very purpose),
or through subscription-based grocery shopping, WMT must begin offering new and
innovative ways to get customers the products they want, without having to wait or take a
trip to the store.

Offer a “prime-like” service for discounts, free delivery, and free in-store pickup - WMT
has already announced its intentions to run a trial on a subscription based shipping
service similar to Amazon Prime, but it is clear that management wishes to shy away
from any co-op model. "We just don't believe you should pay a fee to get a better price,"
said Walmart spokesman Ravi Jariwala in a recent interview.
5. CONVERTING AMZN UBIQUITY TO PROFITABILITY
Amazon is not only the biggest online retailer in the world, but one of the most influential
businesses in history. The company has undoubtedly revolutionized the publishing industry, as
well as made major impacts on entertainment and retail. Amazon's growth has reshaped online
shopping for millions of consumers, and has caused supermarkets to rethink what they sell and
how they sell.
11
However, for all Amazon's remarkable revenue growth, the company has still not
demonstrated that it can generate profit consistently. It is clear that this is not by pure
circumstance, but in fact by choice.
Amazon’s goal is to increase market-share, drive revenue, increase Amazon Prime
memberships, and re-invest cash flow into new and exciting projects. Jeff Bezo’s Company
Model (Appendixt 4) originally drawn on a napkin by Jeff Bezos himself exemplifies the model
in which his company has been utilizing for over 20 years. It seems as though there’s no change
in policy in sight, yet soon the company may be consistently posting profits, as it did in Q2 of
2015. Despite the lack of dividends or profits, Amazon’s stock price continues to surge due to
over-excitement from the market, high growth rates, and new products and technologies being
released quarter-after-quarter. Amazon has decidedly skirted making profits simply because it
remains in investment mode. This may sound somewhat surprising considering that the 20 year
old company is now the world's largest online retailer, but it is a strategy that has paid off for
shareholders to date.
Amazon's poor profitability is not a problem for today’s shareholders, as the company is
using most of its free cash flow to aggressively invest in new products and services. It is
investing in warehouses and data centers. It is selling its Kindle fire at cost or less-than-cost, and
giving one-year free Amazon Web Services subscriptions to developers.
In stark contrast to Amazon, Wal-Mart made more than $16 billion in profit last year.
However, the company faces a strong trade-off between maintaining margins and pursuing sales
growth. Thus, the Company has come out and reduced earnings expectations for the next few
years while they revisit their low-price strategy and determine how to thrive in the internet age.
6. DOES PROFITABILITY MATTER?
12
Compared with the Walmart traditional retail business model, Amazon’s internet
business model is relatively young and in its growth stage. In the past ten years, amazon realized
sales growth approximately 30% each year on average. Building brand loyalty, providing best
service, and achieving the maximum share of the market are the most critical strategy for
Amazon in its current growth stage. Amazon need to set it prices low in order to penetrate the
market, spend more on extending distribution channels and targeting the mass market. We
conclude that for amazon, in order to build a large market share, profitability is not critical at this
stage. However, building customer loyalty is more important for long-term profitability. We
expect amazon could achieve its target market share in five years and start to improve its
profitability. Amazon's history clearly shows that profits are a secondary concern to revenues.
In contrast, Walmart traditional retail model has a longer history, and has entered its
maturity stage. At this stage, sales peak and growth declines as demonstrated by Walmart past 10
year financial data. The average sales growth of Wal-Mart in the past ten years is only 5.09%
compare with 30.03% of amazon. However, as a large market-share entity, Walmart has already
successfully built its customer base and distribution channels, and Walmart has the ability to
create relative higher profit. In the past ten years, Walmart generated average 3.48% of net profit
compared with 1.86% of Amazon. With the emergence of a new internet retail model, the most
important competitive strategy of Wal-Mart is to defend its current market share and maximize
profit through diversification of its business model and increased investment on developing
internet retail model.
7. INVESTMENT RECOMMENDATION
7.1 Rationale
13
We have found that Wal-Mart is the best choice for a ten year investment. Wal-Mart
has consistent financial history that gives us greater confidence in forecasting for the next ten
years. Wal-Mart’s executive team is forward looking, and provides historically accurate
guidance on their expectations. Wal-Mart also provides a consistent dividend yield with direct
verbiage to validate continued growth. We feel that Wal-Mart is currently undervalued relative to
their current performance and future projections.
Amazon, which has wildly sporadic historical financial performance, is too risky at
their current price. The company does not provide dividends, which would require a minimum of
3-4% increase in stock price each year just to match Wal-Mart’s dividend yield. Amazon has
seen substantial increases in stock price over the last year, which makes us nervous about
Amazon continuing this growth pattern.
7.2 Primary Long Strategy
The best strategy based on future forecasts (Appendix 5) is a long position in WalMart. We feel that Wal-Mart is undervalued at this time, and that its financial consistency, along
with dividend yield make it the best choice for a 10-year position.
7.3 Leveraging Options
Wal-Mart’s 10-year outlook is strong, but management has provided guidance that
explains a decrease in EPS from capital expenditures to increase online sales growth. The
increase in CAPEX is projected to last until 2017, and EPS will rebound in 2019. To combat this
period of stagnant growth, we are going to implement a monthly covered call writing strategy
until January 2019. With this strategy (Appendix 6) we will capitalize on small increases in
stock price, the dividend yield, and the option premiums. In 2019 we believe that the stock price
14
of Wal-Mart will begin to rise at a rate that may result in capping our maximum gains if we
continue to write call options.
8. APPENDIX

Appendix 1: 3 Walmart Year Percentage Growth of Stock Price

Appendix 2: 10 year AMZN to DJIA % Change

15

Appendix 3: 10 year WMT to DJIA % Change
Appendix 4 Exhibit J: Jeff Bezo’s Company Model
16

Appendix 5: Wal-Mart Multiple Valuation Model
Red Text Based on Management Guidance
2015
2016
2017
2018
Expected
2020
2019
2021
2022
2023
2024
2025
Revenues $ 485,651.00 $ 500,220.53 $ 520,229.35 $ 541,038.53 $ 557,619.12 $ 574,707.84 $ 592,320.25 $ 610,472.42 $ 629,180.87 $ 648,462.66 $ 668,335.36
Costs $ 469,288.00 $ 485,400.00 $ 502,164.56 $ 521,800.00 $ 538,255.98 $ 554,751.30 $ 571,752.13 $ 589,273.96 $ 607,332.77 $ 625,945.01 $ 645,127.63
Net Income $ 16,363.00 $ 14,820.53 $ 18,064.79 $ 19,238.53 $ 19,363.14 $ 19,956.54 $ 20,568.13 $ 21,198.45 $ 21,848.10 $ 22,517.65 $ 23,207.72
Total Shares
3,243.00
3,108.46
3,001.88
2,905.09
2,811.42
2,720.77
2,633.05
2,548.15
2,465.99
2,386.48
2,309.53
EPS $
5.05 $
4.77 $
6.02 $
6.62 $
6.89 $
7.33 $
7.81 $
8.32 $
8.86 $
9.44 $
10.05
$ 16,363.00 $ 14,820.53 $ 18,064.79 $ 19,238.53 $ 19,363.14 $ 19,956.54 $ 20,568.13 $ 21,198.45 $ 21,848.10 $ 22,517.65 $ 23,207.72
Share Buyback $ Value
$ (10,000.00) $ (10,000.00) $ (9,992.71) $ (10,057.43) $ (10,365.65) $ (10,683.32) $ (11,010.72) $ (11,348.15) $ (11,695.92) $ (12,054.35)
Share Price $
P/E
57.10 $
74.33 $
93.82 $
15.59
15.59
15.59
103.24 $
107.37 $
114.35 $
121.78 $
129.70 $
138.12 $
147.10 $
15.59
15.59
15.59
15.59
15.59
15.59
15.59
156.66
15.59
Appendix 6: Wal-Mart Month Covered Call Option Return Model
Gross Profit $
Net Profit $
Net Profit %
Annualized Net Profit %
Total return

2015
$
16.00 $
0.3%
3.4%
1.00
0%
2016
67.00 $
85.26 $
1.1%
13.8%
1.14
13.76%
2017
18.19 $
39.01 $
0.4%
5.0%
1.19
19.44%
2018
75.74
99.49
1.0%
11.6%
1.33
33.25%
Appendix7 Pro-forma Common Size Income Statement-Walmart (Ruiqing)-done
In Millions of USD except Per Share FY 2016 Est FY 2017 Est FY 2018 Est FY 2019 Est FY 2020 Est FY 2021 Est FY 2022 Est FY 2023 Est FY 2024 Est FY 2025 Est FY 2026 Est
12 Months Ending
Revenue
01/31/2016 01/31/2017 01/31/2018 01/31/2019 01/31/2020 01/31/2021 01/31/2022 01/31/2023 01/31/2024 01/31/2025 01/31/2026
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
75.16%
75.17%
75.17%
75.17%
75.17%
75.17%
75.14%
75.14%
75.14%
75.14%
75.14%
24.84%
24.83%
24.83%
24.83%
24.83%
24.83%
24.86%
24.86%
24.86%
24.86%
24.86%
19.24%
19.24%
19.24%
19.24%
19.24%
19.24%
19.51%
19.51%
19.51%
19.51%
19.51%
5.60%
5.59%
5.60%
5.60%
5.60%
5.60%
5.35%
5.35%
5.35%
5.35%
5.35%
0.43%
0.46%
0.46%
0.46%
0.46%
0.47%
0.43%
0.42%
0.41%
0.40%
0.39%
5.17%
5.14%
5.14%
5.14%
5.13%
5.13%
4.91%
4.92%
4.93%
4.95%
4.96%
1.66%
1.66%
1.65%
1.65%
1.65%
1.65%
1.58%
1.59%
1.59%
1.59%
1.60%
3.52%
3.48%
3.48%
3.48%
3.48%
3.48%
3.33%
3.34%
3.35%
3.35%
3.36%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
3.52%
3.48%
3.48%
3.48%
3.48%
3.48%
3.33%
3.34%
3.35%
3.35%
3.36%
- Minority Interest
0.14%
0.14%
0.14%
0.13%
0.13%
0.13%
0.12%
0.11%
0.11%
0.11%
0.11%
Net Income, GAAP
3.37%
3.33%
3.35%
3.35%
3.35%
3.35%
3.21%
3.22%
3.23%
3.24%
3.25%
- Cost of Revenue
Gross Profit
- Operating Expenses
Operating Income (Loss)
- Non-Operating (Income) Loss
Pretax Income
- Income Tax Expense (Benefit)
Income (Loss) from Cont Ops
- Net Extraordinary Losses (Gains)
Income (Loss) Incl. MI
Source: Bloomberg, Company Financials and Group Estimates

Appendix8. Key Ratio Comparisons - (Ruiqing)-done
17
Walmart
Amazon
01/31/2011 01/31/2012 01/31/2013 01/31/2014 01/31/2015 12/31/2010 12/31/2011 12/31/201212/31/2013 12/31/2014
Profitability:
Return on Assets%
9.07%
Return on Equity%
23.91%
Gross Margin%
25.26%
EBITDA Margin %
7.87%
EBIT Margin%
6.05%
Net Income Margin %
3.89%
Efficiency:
Total Asset Turnover
2.33
Fixed Asset Turnover
3.91
Accounts Receivable Turnover 82.89
Inventory Turnover
11.58
Short Term Liquidity:
Current ratio
0.89
Quick Ratio
0.21
Cash Ratio
0.13
Solvency Ratio:
Debt to Equity Ratio
0.64
Total Liabilities/Total Assets
0.61
Interest Coverage Ratio
12.75
Cash Flow Ratio:
Internal Financing Ratio (CFO/Capex)
1.86
CFO to Current Liabilities
0.40
CFO to Sales Ratio
0.06
Altman Z-score:
Working Capital/Total Assets
0.23
Retained Earnings/Total Assets
0.35
EBIT/Total Asset
0.14
MV of equity/BV of total liability 1.48
Sales/Total Asset
2.33
Z-Score
4.44
shares outstanding
3516.0
Close Price at the end of the year 46.13
Growth Over prior year
Revenue
3.37%
Operating margin
6.42%
EBITDA
6.50%
EBIT
6.42%
Assets
6.09%
8.12%
22.01%
25.02%
7.76%
5.94%
3.51%
8.37%
22.27%
24.87%
7.74%
5.93%
3.62%
7.83%
21.01%
24.82%
7.50%
5.64%
3.36%
8.03%
20.10%
24.83%
7.48%
5.59%
3.37%
6.13%
16.78%
22.35%
5.77%
4.11%
3.37%
2.50%
8.13%
22.44%
4.05%
1.79%
1.31%
-0.12%
-0.48%
24.75%
4.64%
1.11%
-0.06%
0.68%
2.81%
27.23%
5.37%
1.00%
0.37%
-0.44%
-2.24%
29.48%
5.53%
0.20%
-0.27%
2.31
3.98
75.28
10.98
2.31
4.02
69.32
10.71
2.33
4.04
71.33
10.62
2.38
4.16
71.65
10.76
1.82
14.17
21.55
10.68
1.90
10.88
18.70
9.63
1.88
8.65
18.16
10.13
1.85
6.80
15.62
10.05
1.63
5.24
15.86
10.72
0.88
0.20
0.11
0.83
0.20
0.11
0.88
0.20
0.10
0.97
0.24
0.14
1.33
1.00
0.84
1.17
0.82
0.64
1.12
0.78
0.60
1.07
0.75
0.54
1.12
0.82
0.62
0.66
0.61
12.30
0.54
0.60
13.47
0.58
0.60
12.13
0.54
0.58
11.56
0.23
0.63
-15.45
0.34
0.69
-11.97
0.38
0.75
5.12
0.33
0.76
3.12
0.77
0.80
0.62
1.80
0.39
0.05
1.98
0.36
0.05
1.77
0.34
0.05
2.35
0.44
0.06
2.63
0.34
0.10
1.55
0.26
0.08
0.92
0.22
0.07
1.46
0.24
0.07
1.17
0.24
0.08
0.24
0.36
0.14
1.56
2.31
4.47
3418.0
53.86
0.25
0.36
0.14
1.81
2.31
4.62
3314.0
66.12
0.25
0.37
0.13
1.87
2.33
4.68
3229.2
71.5
0.25
0.42
0.13
2.26
2.38
5.05
3228.0
82.34
0.18
0.07
0.07
6.80
1.82
6.44
451.0
180
0.10
0.08
0.03
4.50
1.90
4.92
455.0
173.1
0.07
0.06
0.02
4.67
1.88
4.90
454.0
250.87
0.04
0.05
0.02
6.02
1.85
5.63
459.0
398.79
0.06
0.04
0.00
3.30
1.63
3.73
465.0
310.35
5.95%
3.98%
4.54%
3.98%
6.98%
4.97%
4.68%
4.65%
4.68%
5.01%
1.52%
-3.34%
-1.54%
-3.34%
0.81%
1.96%
1.02%
1.62%
1.02%
-0.51%
39.56%
38.18%
30.99%
24.53%
36.08%
40.56% 27.07%
41.16% 40.16%
-1.47% 45.76%
-38.69% -21.58%
34.48% 28.79%
21.87%
34.05%
41.02%
10.21%
23.36%
19.52%
29.43%
23.16%
-76.11%
35.72%
Source: Company Financials and Group Calculation

Appendix 9: Pro Forma Financial Performance Comparison
FY2016
FY2017
FY2018
FY2019
FY2020
Walmart Amazon Walmart Amazon Walmart Amazon Walmart Amazon Walmart Amazon
growth rate 2.790% 12.000% 2.930% 10.710% 2.840% 9.680% 2.690% 8.820% 2.670% 8.110%
Gross margin 24.829% 34.098% 24.831% 34.184% 24.833% 34.141% 24.831% 34.162% 24.831% 34.152%
Operating margin 5.593% 1.701% 5.595% 1.751% 5.597% 1.726% 5.595% 1.739% 5.596% 1.732%
EBITDA margin 7.430% 4.670% 7.410% 4.584% 7.381% 4.200% 7.310% 4.036% 7.275% 3.874%
Net margin 3.336% 0.355% 3.350% 0.313% 3.352% 0.225% 3.350% 0.161% 3.354% 0.086%
ROA 7.351% 0.531% 7.330% 0.437% 7.287% 0.295% 7.238% 0.199% 7.204% 0.100%

Appendix10 Valuation Assumptions-Walmart & Amazon
18
For fiscal year 2015 (Walmart expressed as 2016, as the company’s twelve months report
ending at January first of each year), the forecast is derived from the first three quarters of data
and our estimates of fourth quarter performance. we use the following assumptions to forecast
financial performance in the 2016-2025 periods ( correspondingly, Walmart expressed as 20172016).
1. Revenue
Walmart: Based on the historical quarterly data, as other retail business, seasonal effect
has obvious impact onto Walmart revenue. Revenues in Q4 are usually much higher than each of
first three quarters. We expect the seasonal pattern will continue in the future, and Walmart can
successfully defend its current market share and maintain its current profitability within ten
years. Based on this assumption, we use two statistical techniques, Multiplicative seasonal effect
technique and Trend analysis technique to forecast the future revenue of Q3 2016 to Q4 2021.
(see historical and forecasted revenue pattern in exhibit #)
Amazon: revenue include Net product sales and net service sales. (see shift in revenue
mix). Similar with Walmart, quarter revenues of Amazon showed seasonal effect two, but
obviously higher growth rate compared with that of Walmart. based on the same assumption that
seasonal pattern and growth pattern will continue until 2020. we expect amazon can successfully
implement its expansion strategy and maintain its current return of capital and reinvestment rate.
we use the same statistical technique to forecast the future revenue of Q4 2015 to Q4 2020. (see
historical and forecasted revenue pattern in exhibit #)
2. Growth rate from 2022 to 2026
19
Walmart: We assume that Walmart EBIT growth rate start to keep constant from 2022 to 2026 as
the market share position of each company in the industry will be formated. the constant growth
rate is calculated using 2 month weighted average technique and the weights are calculated by
excel solver to minimize the means square error. (see calculation for constant EBIT growth
between 2022 and 2026 in exhibit #)
Amazon: as amazon temporarily didn’t generate high operating profit margin, we forecast
growth rate of revenue. based on the same assumption with Walmart, we expect revenue growth
rate become relatively between 2021 and 2026. we calculated the revenue growth rate for each
year by using weighted average technique. (see calculation for constant revenue growth between
2021 and 2025 in exhibit #)
3. Gross Margins and operating expenses
Walmart: Cost of sales primarily consists of actual product cost and the cost of transportation,
and all other operating expenses are recorded as Operating, Selling, general and administrative
expenses. as Wal-Mart has built its mature and stable distribution channel and supplier
relationships, we expect the gross margin and operating expenses relatively keep constant and
use moving average and weighted moving average technique respectively to calculate gross
margin and operating margin in the forecasting period.
Amazon:Operating expenses are classified into six categories: Cost, Fulfillment, Marketing,
Technology and content, general and Administrative, and other operating expenses. Cost of sales
include the purchase price of consumer products and digital media, inbound and outbound
shipping costs, and related equipment costs. we expect Amazon will keep current gross margin
20
level and continue its current investment level for expanding market shares. we use 2 month
weighted moving average technique to forecast the cost/revenue ratio and operating cost/revenue
ratio between 2016 and 2020. However, with the expanded market share, we expect amazon will
successfully implement strategies to reduce total operating expense/ revenue ratio by 2% each
year start from 2021 to 2025, such strategies include the shift in revenue mix towards better
operating profit margin.
4. Non-operating income ( expenses)
Walmart: Other income (expense) primarily consists of interest income and expenses, foreign
exchange gains (losses), and other non-operational income (loss). For forecasting purposes, we
only forecast net interest expenses. interest expenses represent expenses on revolving credit
facility used by Walmart, so interest expenses are directly derived by the long-term debt that the
company have in the previous year. we expect Walmart will keep constant debt ratio in forecast
period and the constant leverage ratio 21.53% is calculated by using exponential smoothing
technique which consider all past observations. ( see calculation for constant D/V ratio in exhibit
#)
Amazon: we based on the same assumption as we do on Walmart, and use the same statistical
technique to forecast the future interest expense. we expect Amazon will keep constant leverage
ratio of 19.29% between 2015 and 2020 and then keep constant interest expenses. ( see
calculation for constant D/V ratio in exhibit # )
5. Income tax expenses
Walmart:Income tax expenses primarily consists of U.S. as well as international corporate
income taxes related to profits. Historically, Walmart ‘s effective income tax rate is lower than
21
the U.S. statutory tax rate primarily because of benefits from lower-taxed global operations, in
addition, certain non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not
subject to current U.S.income tax. we expect effective tax rates are tax rates of moving average
of previous three months.
Amazon: income tax expense include U.S.(federal and state) and foreign income taxes. as has a
uncertain income tax position due to tax contingencies as illustrated in 2014 annual report, we
assume amazon tax rate is 39%
6. Asset

Total Asset.
Walmart: We expect Walmart to be able to maintain this current net income margin, dividend
policy and leverage ratio, and therefore, total asset keep expanding by its historical linear path.
Amazon: Based on the same assumption with Walmart.

PP&E
Walmart: PP &E consists of land, building and improvements, Fixtures and equipment,
transportation equipment and construction in progress. we expect PP& E investment pattern keep
current level and we use 3 month moving average to forecast the PP&E expense in forecast
period.
Amazon: Based on the same assumption with Walmart
7. Liabilities
22
Walmart: Debt. There was $ 4103 debt mature in 2015and will be $4810 debt mature in 2016;
while Walmart issued $5030 new debt in fiscal year 2015 and $6700 new debt in fiscal year
2014. we expect the leverage ratio to remain constant during the forecast period.
Amazon: based on the same assumption, we expect the leverage ratio remain constant during the
forecast period.
8.
Equity
Walmart: Share repurchase activity is depends on the management’s consideration of current
cash needs, capacity for leverage, cost of borrowings, result of operations and the market price of
common stock, etc. for forecast purpose, we assume there is no further issuance and repurchase
of common stock.
Amazon: based on the same assumption.
9. Weighted Average Cost of Capital
Walmart
Variable
Risk Free rate
Market Premium
Beta
Cost of Debt
Market Cap
Debt
Tax rate
Cost of equity
WACC
Value
2.34%
5.92%
0.464598
4.40%
188450
43692
32.20%
5.09%
4.69%
Notes
10-yr treasury bond yield as of 07/11/2015 (http://finra-markets.morningstar.com/BondCenter/Default.jsp)
Implied ERP on Nov.2015 calculated by average CF yield last 10 years ( A. Darmodaran)
Yahoo Finance as of 11/07/2015
Weighted-average variable rates based upon prevailing market rates at Jan. 31 2015 ( 2015 annual report)
Market cap as of 07/11/2015
Forecasted ending balance of debt at Jan 31, 2016
Effective tax rate based on team forecast ( moving average)
Team Calculation
Team Calculation
2.34%
5.92%
1.49107
5.50%
309090
8265
39.00%
11.17%
10.96%
Notes
10-yr treasury bond yield as of 07/11/2015 (http://finra-markets.morningstar.com/BondCenter/Default.jsp)
Implied ERP on Nov.2015 calculated by average CF yield last 10 years ( A. Darmodaran)
Yahoo Finance as of 11/07/2015
Weighted-average interest rate as of December 31, 2014 and 2013 ( 2014 annual report)
Market cap as of 07/11/2015
Forecasted Ending balance of debt at Nov. 30, 2015
U.S. Corporate tax rate
Team Calculation
Team Calculation
Amazon
Variable
Risk Free rate
Market Premium
Beta
Cost of Debt
Market Cap
Debt
Tax rate
Cost of equity
WACC
Value
23

Appendix 11 Discounted Cash Flow Valuation-Walmart
2016 Q4
EBIT
7577.01
EBIT*(1-Tax)
5137.21
Depreciation
2639.40
CAPEX
344.20
Change in working capital
-671.14
Free cash flow to firm
8103.55
Perpetuity method
FCF terminal growth rate
Terminal value
PV of the terminal value
PV of free cash flow
enterprise value
- Net Debt
equity value
# of shares
price per share
Current price
Potential upside
2.34%
1199250.21
755270.20
193754.83
949025.03
38581.00
910444.03
3210.00
283.63
58.78
382.52%
2017
28391.16
19249.20
9326.60
9339.39
-2960.60
22197.02
2018
29223.16
19813.31
9478.80
10079.02
-3236.65
22449.73
2019
30053.47
20376.25
9580.73
10058.35
-3512.70
23411.34
Forecast period
2020
2021
30863.40
31687.90
20925.39
21484.39
9462.04
9507.19
9811.60
9988.00
-3788.75
-4064.80
24364.58
25068.39
2022
32538.40
22061.04
9516.66
10303.10
-4340.85
25615.45
2023
33409.55
22651.68
9495.30
10553.15
-4616.90
26210.72
2024
34305.22
23258.94
9506.38
10850.21
-4892.95
26808.06
Sensitivity Analysis on WACC and terminal growth rate
Terminal growth rate
283.63
0.34%
0.84%
1.34%
1.84%
2.34%
4.23%
198.88
221.65
252.30
295.76
362.18
4.73%
173.99
190.83
212.65
242.00
283.63
5.23%
154.17
167.01
183.15
204.05
232.17
5.73%
138.02
148.04
160.34
175.81
195.84
6.23%
124.60
132.58
142.18
153.97
168.80
WACC
6.73%
113.28
119.73
127.37
136.58
147.89
7.23%
103.59
108.88
115.06
122.39
131.22
7.73%
95.22
99.60
104.67
110.60
117.63
8.23%
87.90
91.58
95.78
100.64
106.33
8.23%
87.90
91.58
95.78
100.64
106.33
2025
35224.25
23882.04
9506.11
11133.13
-5169.00
27424.02
2026
36168.25
24522.07
9502.60
11435.75
-5445.05
28033.97
2.84%
476.31
347.25
272.05
222.78
187.99
162.10
142.06
126.10
113.08
113.08
3.34%
718.33
456.57
333.00
261.00
213.82
180.49
155.69
136.50
121.20
121.20
Terminal
2027
28689.96

Notes: Yellow areas represent prices above $283.63 per share or more than 382.52% potential upside (current prices of $58.78 as of Nov 7, 2015), which yield a strong buy recommendation.

Appendix 12 Discounted Cash Flow Valuation-Amazon
EBIT
EBIT*(1-Tax)
Depreciation
CAPEX
Change in working capital
Free cash flow to firm
Perpetuity method
FCF terminal growth rate
Terminal value
PV of the terminal value
PV of free cash flow
enterprise value
- Net Debt
equity value
# of shares
price per share
Current price
Potential downside
Q415
584.28
356.41
-1154.46
8477.33
-3952.22
11631.50
2.34%
327250.0491
115630.18
102336.26
217966.44
8265.00
209701.44
468.76
447.35
659.37
32.15%
Forecast period
2016
2017
2018
2019
2020
2021
2022
2023
1709.28 1975.69 2251.67 2434.27 2668.23 2874.17 6716.49 11170.26
1042.66 1205.17 1373.52 1484.91 1627.62 1753.24 4097.06 6813.86
3447.75 3643.01 3488.44 3526.40 3552.62 3522.48 3533.83 3536.31
4782.44 5124.59 4875.46 4927.50 4975.85 4926.27 4943.20 4948.44
-5311.98 -5906.72 -5319.31 -5512.67 -5579.57 -5470.52 -5520.92 -5523.67
14584.84 15879.50 15056.72 15451.47 15735.65 15672.51 18095.02 20822.28
Sensitivity Analysis on WACC and terminal growth rate
Terminal growth rate
447.35 0.34%
0.84%
1.34%
1.84%
2.34%
8.96% 514.72
534.11
556.04
581.05
609.84
9.46% 480.21
496.78
515.38
536.43
560.43
9.96% 449.44
463.69
479.59
497.45
517.65
10.46% 421.86
434.19
447.87
463.13
480.28
10.96% 397.00
407.72
419.56
432.70
447.35
WACC
11.46% 374.50
383.88
394.17
405.54
418.15
11.96% 354.05
362.28
371.28
381.17
392.09
12.46% 335.40
342.65
350.55
359.20
368.70
12.96% 318.32
324.73
331.70
339.30
347.61
13.46% 302.63
308.33
314.49
321.19
328.49
13.96% 288.18
293.26
298.73
304.66
311.10
2024
16329.47
9960.98
3530.88
4939.30
-5505.03
23936.19
2.84%
643.33
588.06
540.69
499.67
463.82
432.23
404.21
379.19
356.74
336.48
318.11
Terminal
2025
2026
22265.35
13581.86
3533.67
4943.65
-5516.54
27575.72 28146.5
3.34%
682.77
620.20
567.21
521.78
482.44
448.04
417.73
390.83
366.82
345.25
325.79
Notes: Red areas represent prices lower than $447.35 per share or more than 32.15% potential downside (current prices of $659.37 as of Nov 7, 2015), which yield a sell recommendation.
Appendix 13: Analyst Recommendation Trends
24
WMT Recommendation Trends
Strong Buy
Buy
Hold
Underperf
orm
Sell
Current
Month
Last
Month
Two
Months
Ago
4
4
4
AMZN Recommendation Trends
Three
Months
Ago
4
Current
Month
Last
Month
Two
Months
Ago
Three
Months
Ago
Strong Buy
14
14
13
11
2
2
2
3
Buy
24
23
23
18
21
21
21
20
Hold
6
6
7
14
0
0
0
1
0
0
0
0
1
1
1
2
2
2
2
2
Underperf
orm
Sell
Appendix 14 Additional thought:

Institutional Ownership Stake
Institutional ownership is a subject that is rarely mentioned in the valuation of a
company, but when you compare Walmart to Amazon the drastic difference is a factor that needs
consideration. The institutional ownership stake in WMT and AMZN consists of 31% and 68%,
respectively. With the current analyst projections about the two companies, (Exhibit G) it is easy
to understand why more investment firms would own amazon. 38 analysts have AMZN as a buy
or better compared to just 6 for WMT. Institutions have researchers and trusted analysts to
investigate the firm and the industry potential of the firms. The perception is that high
institutional ownership indicates good value.
In the case of AMZN though, its share price has gone up $300 in the last year and
institutional investors are still supporting that it’s going to go up even further. Amazon’s
financial guidance from their 3rd quarter 8-k says “Operating income is expected to be between
$80 million and $1.28 billion, compared to $591 million in fourth quarter 2014.” The company
itself needs a billion dollar range to estimate its income three months from now, so what is
behind all of these investors support of the company? Is it a groupthink dilemma where no
investor wants to be left out on the hot stock, or is the value really there?
25
WMT on the other hand has specific financial guidance with small projection ranges. The
company states it exact plans for share buybacks, excess capital expenditures in the future, and
its plan to increase dividend yield into the future. Yet, analysts don’t rate the company highly
and many are worried about the company’s future with online sales. When it comes to increasing
your company's stock price, leaving the company's future outlooks up to analysts may be more
beneficial in the short term.

Related Companies (profitable or not) that are over inflated or under inflated
Valeant: On September 17, 2015 Valeant was the pharmaceutical dream company for
investors. 88% of its shares were held by institutional owners and it traded at $241 a share, what
many well known investors said was a value at the time. Less than a month and a half later the
stock now trades at $81. It would seem that Valeant must have underperformed wildly under
expectations to go from $241 to $81. Yet, when you look at what caused their downfall, it does
not directly relate to any actions of the company. First, the company received scrutiny over a
commonly used pharmaceutical pricing strategy. Then, a short selling firm accused Valeant of
falsifying revenues which has still not received any validity. Lastly, a large number of carries
dropped Valeant as a drug provider over those unverified claims. Amazon looks very similar to
Valeant before their downtown. As an inv

Sources
Walmart

10-Q 2009-2015 Q1-Q4, 2016 Q1-Q2

10-K 2006, 2007,2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015
26

Earnings Conference Call Q2 2016

http://stock.walmart.com/investors/default.aspx

http://finance.yahoo.com/q?s=WMT
Amazon

10-Q 2008-2014 Q1-Q4, 2015 Q1-Q3

10-K 2006, 2007,2008, 2009, 2010, 2011, 2012, 2013, 2014

Earnings Conference Call Q3 2015

http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-irhome

http://finance.yahoo.com/q?s=AMZN
Damodaran Online
http://people.stern.nyu.edu/adamodar/
27