Analysts are cheering the decision by Walmart Inc (NYSE:WMT) to put around $16 billion into buying a controlling interest in Flipkart, India’s answer to Amazon.Com, Inc. (NASDAQ:AMZN).
But investors have sent the stock down nearly 4%, fearing this not only puts Walmart on a collision course with Amazon, but with Alibaba Group Holding Ltd (NYSE:BABA) and Tencent Holdings Ltd. (OTCMKTS:TCEHY), a four-way battle it may not win.
The deal was leaked by Softbank Group Corp. (OTCMKTS:SFTBY) CEO Masayoshi Son, ecstatic that his $2.5 billion investment in Flipkart last year is now going to bring in $4 billion.
In the end, he may turn into the big winner. Flipkart had sales of just $3.1 billion last year, so Walmart is paying over six times revenue for it. Walmart tried to build stores in India before, and was stopped by the country’s bureaucracy.
Walmart the Underdog?
Indian commentators are skeptical about Walmart’s chances. They note that e-commerce represents only 1% of their market, and that Walmart would have been much better off going after the 99%.
Flipkart sought a buyout because Amazon is already pressing it hard, having committed nearly $5 billion to the effort and spending $3.3 billion of it. One point not getting enough attention is Amazon’s decision to bring its Marketplace services to India, offering its logistics, cloud and back-end to Indian stores that want to compete against Flipkart.
Walmart CEO Doug McMillon sees e-commerce as essential to Walmart’s future, but it continues to lose momentum in the U.S. market, the shares dropping 20% after its growth rate fell behind Amazon’s last year. Walmart’s market cap is now just one-third of Amazon’s, although its sales remain 2.5 times bigger. Closing on the Flipkart deal, once it’s approved, will cost Walmart all its cash and raise long-term debt as much as 25%. Amazon could have just written a check.
They’re Not Alone
Amazon and Walmart aren’t alone in the India market.
On the same day Walmart’s Flipkart deal was announced, Alibaba said it bought Daraz, Flipkart’s Pakistani doppelganger. It is also backing a smaller Indian e-commerce player called BigBasket. Alibaba had been an investor in Flipkart, along with Softbank, which recently ran a funding round on an even-smaller e-commerce player, Grofers.
Alibaba and Tencent are both heavily involved in the Indian payments space — Alibaba through Paytm, a mobile payment app in which it invested $3.2 billion, Tencent as an investor in a rival mobile payment app called Ola. Tencent is looking to buy up more Indian online assets.
Ego Over Profit?
Fighting an expensive battle halfway around the world doesn’t seem exactly wise, given Walmart’s problems in the U.S. market.
Walmart has closed one-tenth of its Sam’s Club stores, which are fighting a losing battle with Costco Wholesale Corporation (NASDAQ:COST). Its efforts to deliver groceries through Uber and Lyft have been written off as failures.
Walmart also faces a big decision on whether to buy Humana Inc. (NYSE:HUM). The health insurer, with a market cap of $38 billion, will not be an easy lift, but health services could re-fill Walmart stores, and may be necessary for it to compete with CVS Health Corp (NYSE:CVS), which is buying Aetna Inc (NYSE:AET).
The Bottom Line for WMT Stock
Seen from this perspective, the Flipkart deal looks like an expensive distraction.
It puzzled the crew of the Pequod that Captain Ahab kept going after the great white whale Moby Dick when there were plenty of other whales in the sea that could be harvested profitably.
Doug McMillon is beginning to look like Ahab.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, and BABA.
