Poor Walmart Inc (NYSE: WMT). Not only has Amazon.com, Inc. (NASDAQ: AMZN) been eating its lunch for some time, but now Amazon is trying to muscle in on Walmart’s purchase of Indian e-commerce player Flipkart.
WMT was going to buy a 51% controlling interest in Flipkart for anywhere between $10 billion and $12 billion. Walmart was going to buy out Flipkart’s early-round investors, which included Tiger Global and Softbank.
To a certain extent, or at least at first glance, Walmart’s purchase seemed to make sense. Flipkart started in 2007 and, just like Amazon, began by selling books. Today it has more than 100 million registered users, enjoys 10 million daily page visits, ships roughly 8 million items every month, and became this powerhouse by rolling up its smaller competitors by using the billions of dollars it raised from its initial investments.
Bad Fit for WMT Stock
There is, however, a similarity with Amazon that makes it a bad fit for Walmart stock owners. While Flipkart has revenue of about $3.5 billion, it is also saddled with $650 million in annual debt service, and posted a loss of $1.3 billion on an annual basis.
If Walmart is going to pony up $12 billion, it’ll raise its debt position by nearly one-third to almost $50 billion. Although WMT stock generates $500 billion in revenue every year, adding $3.5 billion more is going to be a drop in the bucket.
Sure, WMT stock management probably hopes it’s going to expand this business. India is not exactly a small country, and it has a lot of residents. So there is probably room for sizable growth here.
In addition, Walmart is scrambling to hold off Amazon. That was certainly one of the reasons for its purchase of Jet.com. Moving into India in aggressive fashion does make a certain degree of long-term sense.
Which is exactly why Amazon entered the ring, and offered to buy 60% of Flipkart and sweetened the deal by adding a breakup fee of $2 billion. While I don’t put pettiness past Jeff Bezos, spending more than $12 billion on a company is not petty. Amazon clearly sees synergy with its own business in buying Flipkart.
Losing Battle for WMT?
To my mind, Walmart is losing a long-term battle to Amazon. However, there is an argument to be made that WMT stock management is trying to stay one step ahead. We know that Amazon purchased Whole Foods market for a number of reasons, not the least of which is establishing the chain’s footprint as a way to deliver food to their homes.
Walmart is leveraging the growing base of third-party delivery services to also push into grocery delivery. By the end of the year, Walmart wants to have this delivery service and more than 2,000 of its stores. For a fee of $10, customers can have a personal shopper properly choose meat and produce and deliver it.
This is an interesting tactic, as well as an intriguing job growth initiative. Apparently Walmart has hired almost 20,000 individuals who are, or will be, trained in how to properly select meat and produce. This is the kind of initiative that Amazon can certainly mirror. Yet I like the way Walmart is thinking.
Bottom Line on WMT Stock
I should make one other note. I’m crowing about Amazon and kicking Walmart when it is apparently down. And while it is true that Amazon’s growth story has been pretty incredible, Walmart stock still generates almost three times as much revenue, net income and free cash flow on an annual basis.
I don’t like WMT stock at its present valuation, and I’d like to see actual impact from some of its new initiatives. Right now I would not be a buyer of WMT stock but if there is a major market correction, it may be worth revisiting.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.