Buy Walmart, Target as online sales growth starts to outpace Amazon's, Bank of America says

Key Points
  • Bank of American Merrill Lynch says Target and Walmart online sales are outpacing those at Amazon and urges clients to buy the stocks.
  • Analyst Robert Ohmes says Walmart saw its U.S.-owned e-commerce growth accelerate to 43 percent in the third quarter, while Target jumped 49 percent year-over-year.
  • Ohmes adds that the snowballing growth has been supported by the rapid expansion of buy-online, pick-up in store options.
Jeff Bezos
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Online sales growth at Target and Walmart is starting to snowball as the holiday season enters full swing, with new data showing the retail giants growing digital sales faster than rival Amazon.

Walmart's U.S.-owned e-commerce growth accelerated to 43 percent in the third quarter, while Target posted a record 49 percent year-over-year surge, according to Bank of America Merrill Lynch. Given the robust gains, analysts at the brokerage wrote to clients Thursday that investors should buy either stock as shoppers log on to do last-minute shopping.

"The impressive sales acceleration reported by both Walmart and Target in the most recent quarter implies both company's expanding omni-channel initiatives are resonating with shoppers," Bank of America analyst Robert Ohmes wrote. "This growth has outpaced that of other brick and mortar retailers as well as online players like Amazon, and has been supported by the rapid expansion of buy-online, pick-up in store options at both retailers."

Both Walmart and Target likely captured market share during the all-important Black Friday-Cyber Monday weekend, Ohmes added. The analyst said Adobe Analytics online data for 80 of the top 100 retailers showed "impressive" growth across the period, with $24.2 billion in sales, up 23 percent from a year earlier.

Shoppers are also opting to collect items in store after placing orders online, Ohmes said, with physical stores driving a 28 percent higher conversion rate, suggesting that retailers that offer both online platforms and brick-and-mortar locations took share. Ohmes has a $115 price target on Walmart, implying 18 percent upside.

Despite any pickup in digital revenues, Walmart has underperformed in 2018.

Analysts have pointed to increased investments overseas as well as macroeconomic headwinds — like currency fluctuations and dwindling benefits from President Donald Trump's tax cuts — for the stock's tepid performance.

Writing after Walmart reported its quarterly earnings earlier this month, Raymond James analyst Budd Bugatch said that overseas investments are expensive, but that the long-term story remains healthy.

"Strategically, we continue to support management's long-term strategy to continue investments in growth geographies (China & India) and growth opportunities of the new world of retailing (i.e., Flipkart)," Bugatch wrote at the time. "However, management's strategy comes at a price and will continue to impact operating income and earnings growth in the near-term."

Target reported earnings that fell short of expectations last week amid higher labor costs and investments in same-day delivery.

Despite the earnings miss, Target doubled down on its guidance for the full year and said it's "better positioned for this holiday season than ever before" against a backdrop of strong consumer confidence in the U.S. Bank of America has a price target of $100 on Target, implying 40 percent upside from the current price.

Amazon, meanwhile, has outperformed the this year as CEO Jeff Bezos continues to expand the company's Web Services and shore up its consumer product business. The stock is up 43 percent versus the market's 2.6 percent gain.

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