Last year, Walmart (NYSE: WMT) started a premium subscription service called Jetblack. A recent Wall Street Journal report has shed some light on this program, whose subscription revenue could help improve sentiment towards Walmart stock.
Jetblack offers customers a personal shopper-like experience and costs its subscribers $600 per year. This premium service was developed last year by Marc Lore, who joined Walmart when WMT acquired Jet.com in 2016. Lore was previously able to build niche online businesses while competing against Amazon (NASDAQ: AMZN).
WMT is also focusing on its online-advertising business. It is hoping that it can replicate Amazon’s success in advertising. While WMT has been trying to catch up with AMZN in this area for a few quarters, it is now making some bold moves. Walmart stock is also trading at a reasonable valuation, giving WMT stock the potential to rise more than AMZN stock.
Differentiating Through Premium Service
The ability of Walmart to sustain heavy investments and losses has enabled Lore to make large bets. He made one such bet on Jetblack, which targets wealthy individuals who would like a more curated shopping experience. This service i currently is limited to people living in Manhattan. So far, it only has a few hundred members, but they are buying an average of ten items for a total of $300 per week. That is much more per capita revenue than Amazon Prime generates, as you can see from the chart below.
Source: CIRP
The chart, based on a CIRP report, shows that the average annual spending of those who have been members of Prime for three years is $1,400. So far, Jetblack members are spending about ten times more on average than longtime Prime members. Jetblack is still a money-losing initiative for Walmart, but the company hopes that it will be profitable down the road.
It also remains to be seen whether WMT will be able to dramatically expand this service, given the very small number of people currently using it. The company would need to add many more markets and members to move the needle of its overall subscription revenue. However, this initiative shows that WMT is aggressively trying new options in its e-commerce business. This out-of-box thinking is a big positive. for a company that is as large as Walmart
Underestimating Walmart’s Potential Revenue From Online Advertising
In the last few quarters, Amazon has built a strong advertising business. In 2018, its Other revenue, which consists mostly of advertising, came in at over $10 billion.
Source: Amazon Filings
The rapid growth of Amazon’s advertising business can be replicated by Walmart. Both shopping platforms enjoy similar advantages compared to Facebook (NASDAQ: FB) and Alphabet (NASDAQ: GOOG, GOOGL).
WMT is continuously adding new products and sellers to its platform. The company also has the advantage of a massive store base.
Source: Marketplacepulse
The Valuation of Walmart Stock
Walmart stock has a lower valuation than Amazon stock and Alibaba (NYSE: BABA). At the same time, Walmart’s market share within online advertising and subscription services could reach decent levels.
It should also be noted that WMT has a strong partnership with Tencent (OTC:TCEHY). In China, Tencent has invested in a wide range of e-commerce and other services.
Retailers and sellers who view Amazon as a threat could end up joining forces with Walmart. At the same time, the valuation of Walmart stock does not reflect the company’s upside potential.
The company’s operating margin improved last quarter, and Walmart stock has a dividend yield of over 2%and an enterprise value to free-cash-flow ratio of less than 20. Walmart also has a very defensive business. Those who believe we might have a correction or recession in the short-term can use Walmart stock as a defensive investment.
If WMT is able to generate strong subscription and advertising revenue, sentiment towards Walmart stock should greatly improve.
The Bottom Line on Walmart Stock
The traction of WMT’s premium Jetblack subscription service has been improving. The service culd be expanded to additional U.S. markets over the next few quarters. WMT is also in a good position to expand its advertising business. This is a very high-margin business which can massively raise WMT’s overall margin. Walmart stock is trading at less than 20 times its EV to FCF ratio with a healthy yield. These advantages make Walmart stock a buy.
As of this writing, Rohit Chhatwal held no positions in the aforementioned securities.
