GALIMBA, Marienne Joy D.

BA 209 Investment Management

Real Vision Investment Case Study

1. Which of the two companies is the market mispricing and why?

Generally speaking, prices in the stock market are driven by supply and demand. Based

on the data given in the case study, projected Amazon’s stock prices are reflective of its

revenues rather than its income and it failed to consider other factors that may affect its stock

price. Hence, Amazon is highly mispriced. With its relatively high demand, the e-commerce

industry is undeniably booming nowadays making it a channel that is here to stay. However,

what the market is not considering in pricing the Amazon’s stocks are the long-term demands

of its consumers. Over time, consumers will be attracted in using multiple channels not just

Amazon. Amazon is facing significant competition in its e-commerce business as the barriers

to entry in the online shopping businesses are quite low. Hence, affecting the demand for

Amazon. Another factor that can also affect the demand for Amazon is their dependence of

their free shipping promotions. This is effective if freight charges are low, however, if there

will be an increase on the shipping costs, I think this will destroy their ability to turn profits if

they continue to shoulder shipping fees of their customers. Otherwise, they need to limit or

even stop giving free shipping promos but this will eventually affect their sales too. If these

factors are taken into account, Amazon stocks would be fairly priced.

2. What changes must Walmart make in order to effectively compete in the internet age?

With Walmart’s massive supply chain footprint that its rivals don’t come close to, they

are positioned to increase, if not dominate, shares in the e-commerce space. They can achieve

this by taking advantage of their massive supply chain as their leverage to provide same day

deliveries which in the next 10 years will outcompete Amazon since supply chains that are as

massive as Walmart’s is hard to establish. Walmart must not simply copy Amazon’s online

model, Walmart must differentiate itself instead in terms of its strategies for deliveries. Due to
 the density of Walmart stores, it will be able to provide same day deliveries easily and at the

same time, shipping costs can be at a more affordable prices.

Other strategy that Walmart must implement to become a major ecommerce player is

to inculcate in the minds of its customer that it is also an ecommerce option. In order to do this,

Walmart must promote highly differentiating capabilities in response to its competitors. One

major differentiating service is the omnichannel, which will result from the capabilities born

from the combination of a physical and an online ordering platform. The consumer’s perception

of shopping at a Walmart store and shopping online should be seamless. Hence, Walmart must

promote both of these channels and design a mobile phone interface that empowers the

consumer even more.

3. Will Amazon be able to convert ubiquity into profitability?

With the emerging technologies, e-commerce has become the trend and is very in

demand nowadays. This business model has enabled online stores such as Amazon to be present

everywhere and can be accessed anytime and anywhere. Given its current market position, I

don’t think Amazon has a demonstrable plan to be able to convert its ubiquity into profits. With

it being very common and considering high competition in the market, its ubiquity does not

guaranty Amazon profitability given the high costs it requires to differentiate its business model

to its rivals. Not to mention the difficulty in penetrating the international markets which in order

to succeed, Amazon should adapt to local culture.

4. Does profitability matter? Why?

Profitability is the primary goal for all business ventures. Without it, businesses will

not survive in the long run. And as what is shown in the study, profitability does matter to the

extent that it can influence decisions of potential and even existing investors. If a company is

profitable, surely investors will be encouraged to invest with a high expectation in the company.

However, if the company is not profitable, investors would probably be looking for other

companies with better opportunities to invest into. As stock prices is also closely related to the
 revenue of the company, investors would be more attracted to companies which they foresee to

yield greater returns in the long run.

5. How would you structure your investment into your chosen company?

If I am going to choose between Amazon and Walmart to invest in a 10-year term, I

think that Walmart’s stocks have a better potential than that of Amazon. Walmart has a great

opportunity in increasing its stock prices by developing its e-commerce channel. Amazon on

the other hand has more downside potential considering that it is highly valued at the present

and its business model has many threats.

With that, Walmart’s stocks should be purchased as a long-term play. I plan to buy and

hold Walmart stocks as I believe that this investment will perform well over many years. Also,

it can be effective to short sell stocks of Walmart’s competitors as it is expected to outperform

its competitors in the future. That way I can take advantage of price drop of its competitors’

stocks.