Anders Bylund, Chuck Saletta, and Leo Sun, The Motley Fool
Updated
Online retailer and cloud-computing pioneer Amazon.com(NASDAQ: AMZN) has delivered fabulous returns for long-term shareholders. Investors in the 1997 initial public offering have scored a heart-stopping 75,000% return so far -- including a 380% gain in the last five years alone. This juggernaut is not slowing down.
So what would it take to outperform Amazon in today's stock market? We took that question to a handful of your fellow investors here at The Motley Fool, and they were quick to shoot back a few intriguing ideas.
Read on to see why they think Chinese e-tailer JD.com(NASDAQ: JD), retail giant Wal-Mart Stores(NYSE: WMT), and fiber-optic components maker NeoPhotonics(NYSE: NPTN) can do better than Amazon for new investors today.
A young man, tablet in hand, celebrates good news with a fist pump
This could be you, checking out your returns on these investments. Image source: Getty Images.
Don't overlook this Chinese e-tailer
Leo Sun (JD.com): Most investors see Alibaba(NYSE: BABA) as the undisputed king of the Chinese e-commerce market. However, its biggest rival JD.com -- which is often compared to Amazon -- might have more room to run.
Alibaba's Tmall controlled 51.3% of the Chinese e-commerce market in the second quarter of 2017, according to Analysys International Enfodesk. JD.com came in second with a 32.9% share. But back in 2014, Tmall controlled 54.6% of the market, while JD.com controlled just 17.7%.
JD.com's growth is attributed to two major tailwinds. First, JD.com gained ground as smaller B2C (business to consumer) marketplaces flopped. Second, Chinese consumers retreated from dodgy C2C (consumer to consumer) marketplaces like Alibaba's Taobao and prioritized quality and authenticity over low prices. JD.com capitalized on that shift and touted its reputation as a quality-oriented B2C marketplace that cracks down on counterfeit goods, while publicly chastising Alibaba's quality-control issues.
The company also partnered with Wal-Mart, Tencent, flash-sale site Vipshop, and other companies in data-sharing or order-streamlining deals to widen its moat against Alibaba. It also launched a drone delivery service for rural areas last year.
JD.com's revenue rose 44% last year, but it posted a net loss. However, it squeezed out profits over the past four quarters, and analysts expect it to post its first annual profit this year as its revenues grow another 39%. Therefore, this stock still looks primed for some big gains over the next few years.
Future returns are what matter to investors
Chuck Saletta (Wal-Mart): Amazon's past investment returns have been impressive, but what matters to investors is how well their shares will perform in the future. On that front, Amazon's retail archrival Wal-Mart looks like it might be a much stronger investment today than Amazon.
The table below shows a handful of key measures for both companies. Wal-Mart wallops Amazon from the perspectives of revenue, earnings, and balance-sheet strength, yet Amazon has more than twice the market capitalization of Wal-Mart. That gap is likely not sustainable, and thus Wal-Mart may actually be positioned for stronger future returns than Amazon.
Company
Market Cap
Trailing Revenue
Trailing Earnings
Debt-to-Equity Ratio
Wal-Mart
$309 billion
$495 billion
$11.4 billion
0.64
Amazon
$623 billion
$161 billion
$1.9 billion
1.75
Data source: Yahoo! Finance.
While Amazon's tremendous growth rate justifies something of a premium valuation, it's hard to accept that every dollar of Amazon's revenue should be worth six times Wal-Mart's (twice the market cap for one-third the revenue). That's especially true given that Wal-Mart's profit margin rate and absolute dollars of profit are well ahead of Amazon's. Thus, while bulls on Amazon point to its ability to reinvest cash into growing its business, the reality is that Wal-Mart is also willing to invest in fighting back to growth.
Indeed, Wal-Mart's recent investments in its e-commerce platform and its buy-online, pick-up-in-store program are generally acknowledged as key drivers of its recent growth. As consumers get used to combining the convenience of online ordering with the speed of in-store pickup at Wal-Mart, Amazon may find itself in the unusual spot of needing to invest merely to catch up.
Temporary trouble in big China
Anders Bylund (NeoPhotonics): If you want to reach for huge returns, you have to accept a little risk. NeoPhotonics makes optoelectronic components for use in high-speed optical networking equipment, and it's deep in the doldrums right now. The future doesn't even have to be all that great in order to give NeoPhotonics investors a fantastic return on their investment -- a simple return to normal market conditions would be plenty.
The company was firing on all cylinders at the end of 2016. Fourth-quarter sales came in 23% above the year-ago period's, clients were clamoring for NeoPhotonics' latest and fastest modules that could handle 100 gigabits of data per second, and share prices reached multiyear highs.
Then an important part of NeoPhotonics' distribution network in China filed for bankruptcy, throwing a large spanner into the works. On top of that, sector peers have reported generally slow business in China and North America, as telecoms and their equipment providers hammer out plans for the next wave of infrastructure upgrades.
So revenues plunged 35% lower in the next quarterly report, and the company has delivered a string of negative operating profits ever since. Share prices came crashing down, falling as much as 75% below those late-2016 highs before stabilizing.
Today, NeoPhotonics has mended its Chinese infrastructure and introduced even faster networking modules. Management expects to a quick return to predictable revenue growth, including positive earnings by the middle of 2018.
There's a substantial helping of downside risk here. NeoPhotonics burned $32 million of free cash in the third quarter of 2017. The company raised $30 million of new long-term debt in that quarter, and the cash balance is running low at just $71 million. But if management's rosy forecast works out as expected, that should be enough to see NeoPhotonics through these lean quarters to a fresh stretch of explosive growth.
The optical networking industry will remain important and valuable for the long run, notwithstanding the slowness of 2017. Newer, faster, and better networks are coming soon, and all of them will need fiber-optic components to connect everything to the internet at large.
Let's just hope that NeoPhotonics sticks around until the big bounce starts -- or gets picked up by a more fortunate rival along the way. Either way, this unprofitable stock offers a tempting risk-reward balance today.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Alibaba, Amazon, and NeoPhotonics. Chuck Saletta has no position in any of the stocks mentioned. Leo Sun owns shares of, and The Motley Fool owns shares of and recommends, Amazon, JD.com, and Tencent Holdings. The Motley Fool has a disclosure policy.
