Why Is Amazon so Much Cheaper Than Walmart and Costco? This Is the Only Answer I Can Think of.
Amazon is cheaper than Walmart and Costco on a key valuation metric, but the reason why may surprise investors.
Overview
Amazon (NASDAQ: AMZN), the company most people file under "expensive growth stock," trades at a lower forward price-to-earnings ratio than two old-school retailers, Walmart (NASDAQ: WMT) and Costco Wholesale (NASDAQ: COST). The forward P/E ratio, for anyone newer to this, simply measures how many dollars investors are paying today for each dollar of a company's expected earnings over the next year. The lower the number, the "cheaper" the stock on that one yardstick.
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By that measure, Amazon is the bargain of the bunch. It recently traded at a forward multiple in the high 20s, while Walmart sat closer to the high 30s and Costco commanded something in the mid-40s. Read that again: The market is asking you to pay far more for a dollar of Costco's future profit than for a dollar of Amazon's. For a business as fast-growing and dominant as Amazon, that feels backward. So what's going on? After turning it over for a while, the only answer I can settle on is that these three stocks are being priced for completely different things.
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Originally published at www.fool.com.