Walmart Looks Like Amazon Did 10 Years Ago

May 10, 2018

Walmart Looks Like Amazon Did 10 Years Ago

  • Flipkart is the future, and WMT goes down 3%.
  • A good return with low risk can be reached with a prudent approach to investing in WMT.
  • WMT’s online business is now where Amazon’s was 10 years ago.



Introduction

Walmart (NYSE: WMT) recently announced that it will pay $16 billion for a 77% stake in Flipkart, the Indian online retailer. This is the company’s largest acquisition to date, and shows how in today’s world, it’s still important to look beyond current numbers and invest in growth.

I want to discuss Walmart and what they are doing for the long term, compare that to Amazon, see whether their strategies are fairly valued by the market, and how to go about investing in WMT.

Flipkart Acquisition

Flipkart had net sales of $4.6 billion in 2017 and grew at 50%. However, the company isn’t profitable and WMT expects a hit of $0.3 in fiscal 2019 to its EPS, and $0.6 in 2020 as the company will heavily invest in growth. So, on the $4.6 billion in revenue growing quickly, WMT expects to lose at least $1 and $2 billion per year, respectively. This is a significant part of their $10 billion expected net income and therefore, investors weren’t happy about the acquisition and the stock went down 3% on Wednesday when the deal was announced.

Figure 1: WMT’s stock price on announcement. Source: CNN Money.

On top of that, the stock is down more than 15% from its recent top. Let’s look at WMT’s numbers to see what’s going on there.

Figure 2: WMT’s expectations. Source: WMT.



WMT expected EPS between $4.75 and $5, which will now be revised downwards to $4.5 to $4.8. The lower range would give WMT a PE ratio of 18.44 which is in line with the market’s PE ratio.

However, WMT now has the largest e-commerce platform in India which is something extremely important given the economic growth and development India is enjoying. What’s also important is that WMT’s online sales have grown 40% in the last 12 months. The stock was also hit because WMT had a problem with managing inventory that lowered e-commerce sales growth to 20% in the last quarter of 2017. Nevertheless, WMT’s online sales in the U.S. were $11 billion. This is practically irrelevant when compared to the total sales of $500 billion, but let’s look at this from a valuation standpoint and compare it to Amazon.

Amazon Comparison

Amazon’s sales growth has been around 25% over the last year with the growth spiking to above 30% in the last quarter. AMZN’s revenue was $193 billion in the last 12 months with profits of $4 billion for a $778 billion market cap.

WMT’s revenue was $500 billion with net income of $10 billion, but the market cap is 3 times smaller than AMZN’s. Now that we add Flipkart to WMT’s online revenues, and given the continuing growth, WMT’s online sales might be closer to $20 billion in 2018 which is exactly what AMZN had in revenues in 2008. Fast forward 10 years, and AMZN has increased its revenue 10 times.

Given that WMT has similar growth rates, it might do the same over the next 10 years which would make the Flipkart acquisition a bargain in the long-term perspective. Something like when Facebook bought Instagram for just a billion.

At the moment, Flipkart has 54 million customers in India where the smartphone penetration rate is still at just 30% and expected to be at 55% in 2020. Thus, Flipkart is positioned for growth.

Figure 3: Flipkart’s past growth. Source: WMT.



Conclusion & Investment Insight

WMT paid $17 billion for Flipkart which is less than their annual free cash flows of $18 billion which are mostly spent on dividends and buybacks. However, I would argue that it’s better to buy future potential than to buyback shares of a slow growth company like WMT. Imagine where a company like WMT would be if it reinvested all of its yearly cash flows in growth stories.

Let’s say that WMT invests $17 billion per year in growth-related investments, be it organic or via acquisitions. I would bet that there would be some flops, but there would also be the opportunity for some great things to happen which might double WMT’s revenue and profits in the next decade. However, there is a small issue which is perhaps an advantage for the intelligent investor.

Wall Street hates uncertainty and loves dividends, buybacks, and linearity. The mere example of Amazon, where its stock went up 15 times over the past 10 years, is a confirmation of Wall Street’s myopic view as few saw what has happened over the past 10 years.

Therefore, WMT might provide better investing opportunities as the future growth weights on current earnings. Earnings declines in the next two years might make WMT a declining company in Wall Street’s eyes which could give better investing opportunities especially when combined with higher interest rates which make WMT’s dividends less attractive.

The key is that in the long term, this could very well turn into a great dividend growth investment where the dividend and buybacks are already satisfying now but could be even better in the future. If you already hold WMT and reinvest the dividends, you should do fine over the next decade or so, but take advantage of its future higher volatility and make sure to reinvest the dividends when things seem bad due to short term issues like the inventory issue in the last quarter or the retail scare two years ago when the company was trading below $60.

I will continue to keep an eye on WMT as I think a prudent approach can lead to good returns with low risk if one is ready to do the opposite of what Wall Street thinks and does.



By Sven Carlin Amazon Investiv Daily Walmart Share:
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