Grocers have been the latest businesses to find themselves in the crosshairs of Amazon.com, Inc. (NASDAQ:AMZN), and that has significantly brought share prices in the sector down.
Discount superstore Walmart Inc (NYSE:WMT) is no exception, and WMT stock has fallen more than 20% since the end of January as investors questioned whether the company’s spending spree would be worth it in the long run.
However, although a dip in WMT stock is justified, I think at $84 per share, Walmart stock is undervalued. Yes, the firm is facing a tough few years, but the long-term potential is there.
The main worry driving WMT stock’s dip right now is the company’s deal to buy 77% of online shopping platform Flipkart. Walmart is paying a staggering $16 billion to take over the majority of the business, a price that many believe is too high considering WMT won’t even own the entire business when the deal is done.
The Flipkart purchase was expensive and will likely hurt the firm’s earnings in the coming years. Although Flipkart offers WMT a huge international expansion opportunity, it’s still a relatively young business that is unlikely to become profitable anytime soon.
However, despite the cost, acquiring Flipkart was a positive step toward shoring up WMT’s position as a top retailer over the next decade. It was a necessary evil, and investors who are looking for long-term gains should see it that way.
India offers a massive growth opportunity for retailers, especially in e-commerce. Flipkart is how Walmart plans to take advantage of that expanding market. Right now India’s e-commerce market is worth around $38 billion, but over the next decade, that figure is expected to grow to about $200 billion as more and more Indians connect to the internet.
Having Flipkart gives WMT a way to make a dent the Indian market, more specifically the quickly growing e-commerce market. Not only that, but Walmart is planning to start offering a wider selection of authentic Indian goods to customers around the world by using its new contacts in India to source everything from handicrafts to food products.
The bottom line on the Flipkart investment is that Walmart is trading short-term losses for long-term gains. WMT investors who agree and believe in the firm’s push into India should see the pullback as an opportunity to take a long-term position.
Another huge factor for WMT stock in recent months has been the company’s declining margins, especially in the e-commerce space. On one hand, Walmart has been able to grow its e-commerce business significantly even in the face of intense competition. The most recent quarter saw e-commerce sales rise by 33%.
However, the trouble is that those sales are far less profitable than in-store sales because the firm is still building out its online infrastructure. For that reason, even though comps were up in the first quarter, Walmart’s operating margin declined 30 basis points.
The fact that WMT has to take losses in order to grow its e-commerce business is par for the course, and the firm is not alone in doing so. Peers like Target Corporation (NYSE:TGT) and even Amazon itself suffered losses in order to grow online sales. Again, I think investor concern about the short-term effects is founded, but overdone.
Walmart is setting itself up for the future here, and the e-commerce growth is proof that its efforts are paying off. A big part of e-commerce is convenience, so Walmart needs to spend in order to offer customers fast shipping and in-stock items to ensure that they return to Walmart.com next time they are looking for something.
Walmart is also spending a great deal building out its online grocery business, another move that I think is essential to the firm’s success in the future. The shift toward online grocery shopping is happening now, and WMT needs to emerge as a winner.
This year Walmart is aggressively expanding its grocery delivery service. Although the cost of doing so hasn’t been popular among shareholders, it’s the right decision when you consider the company’s long-term chances of success.
The Bottom Line on WMT Stock
There’s no question that WMT stock has a few bumpy years ahead as the firm works to position itself for the future and waits for its e-commerce efforts to pay off. However, the decisions Walmart’s management is making have been smart, and investors should be applauding its decision to think long term.
I don’t see WMT stock making its way back above $100 over the next year, but I don’t think it would be unreasonable to expect the stock to climb above $90 per share before the year is out. It’s tough to find undervalued blue-chip stocks in today’s market, but right now I think Walmart is one of them.
As of this writing, Laura Hoy was long AMZN.