When asked for an example of a giant company with highly valued stock, the retail giant walmart (WMT -1.25%) A great example immediately comes to mind. The massive retail empire built by Sam Walton has become a symbol not just for the retail industry, but for giant corporations and even the entire economy.
Therefore, many companies strive to match or outperform Walmart in various ways. For example, every retailer wants to surpass the $535 billion market capitalization of Walmart, the industry’s largest market cap.
In that regard, we’ve identified two retailers that are likely to achieve that goal over the next 10 years. By 2033, both of these stocks he expects to surpass the $535 billion benchmark. And I wouldn’t be surprised if both companies were worth more than Walmart on an apples-to-apples basis at that point.
Although both companies will take very different routes to their ambitious destinations, both are worthy investments with plenty of wealth-generating shareholder value.
Costco: Emerging Retail Star
Major warehouse retailer costco (Fee -2.25%) The company is similar to Walmart in many ways, especially when comparing the company to Sam’s Club operations. Both chains operate bulk shopping warehouses with low prices and a limited range of brands, and require paid memberships.
Although the price difference between similar products at Sam’s Club and Costco is usually small, the generic Kirkland brand has a reputation for being of high quality that cannot compete with Sam’s Club’s Member’s Mark line. Why not? After all, Kirkland items are often rebadged versions of big brand products, available at lower prices.
This reputation for high-quality generic products gives Costco a competitive advantage. Additionally, its employees typically enjoy higher salaries and better benefits than their Sam’s Club colleagues. Costco maintains that distinction, even if it hurts the company’s financial results during difficult times.
That’s the secret to Costco’s success. Happy employees tend to be more enthusiastic about their work, which results in higher quality work and more positive communication with customers. And it’s reflected in customer experience ratings and financial results. Costco has a very positive Net Promoter Score of 57 (on a scale of -100 to 100), with the majority of survey respondents reporting a positive experience at the store. Walmart’s low-wage employees have a less memorable experience, with a Net Promoter Rating of -9. In other words, while shoppers look forward to their next trip to Costco, going to Walmart (and Sam’s Club) tends to feel like a necessary hassle.
As a result, Costco has delivered higher revenue growth than Walmart in nearly every quarter. For example, in the latest report, Costco showed sales growth of 9.4% year over year, while Walmart’s sales growth was only 5.7%. If you want a more direct comparison, Sam’s Club’s net sales decreased by 0.1% over the same period.
That’s why I expect Costco to continue to catch up to Walmart’s massive market cap of a few years ago — Costco’s $15.2 billion market cap is just 6% of Walmart’s $257 billion market cap. Costco now commands a valuation of $251 billion, or 58% of Walmart’s market capitalization, nearly outperforming its old benchmark.
This trend could easily continue for another decade, but I’m not sure Walmart can stay ahead of this relentless pursuit.
Alibaba: A fallen giant with a sure future
China’s e-commerce giant alibaba (Baba -2.05%) is a completely different story.
The online retail giant was already significantly larger than Walmart in the past. From 2016 to 2021, Alibaba’s market capitalization was consistently larger than Walmart’s. Regulatory changes in the Chinese market caused stock prices to decline at that time, and Alibaba was also fined $2.8 billion under China’s antitrust laws that same year. Stocks are struggling to recover from legal setbacks amid a global economic downturn and rising inflation.
In some important respects, Alibaba remains in Walmart’s shadow. For example, the company has collected significantly higher free cash flow than its US peers since his 2018.
That means Alibaba’s stock currently trades at 7 times below free cash flow, while Walmart’s stock trades at 23 times the same metric. There’s a similar gap in after-tax prices and earnings forecasts, with U.S. companies looking significantly more expensive next to Chinese companies. Sector rivals if you base your analysis on price to book value or total cash.
He acknowledges that antitrust laws are a cause for concern, especially if the Chinese government finds new reasons to complain about Alibaba’s operations. But for a company that generates more than $30 billion in annual cash profits, a $2.8 billion fine is just a slap in the face. And China’s government has recently taken dramatic steps to stimulate its struggling economy, which could have long-term benefits for local industrial giants like Alibaba.
All in all, Alibaba doesn’t have a tall order here. It’s just a matter of recovering from an unfortunate stumble. This stock used to be bigger than Walmart, and it could return to that position again. Play by the rules (which are always changing, sometimes strict, sometimes beneficial), keep an eye out for international expansion ideas, and revisit e-commerce 101.
Mr. Anders Byland holds a position at Alibaba Group. The Motley Fool has positions in and recommends Costco He Wholesale and Walmart. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.