Much of the brick-and-mortar retail sector has struggled to adapt to Amazon (NASDAQ:AMZN) and the e-commerce world. However, not only is Walmart (NYSE:WMT) surviving in the digital age of retail, it’s thriving. In fact, the WMT stock price has outperformed the S&P 500 index over the past three years.
Walmart has paid a high price investing in modernizing its business. Online sales, in-store pickup, and free next-day delivery are just a few of its improvements. In addition, Walmart acquired e-commerce platform Jet.com and Indian online retailer Flipkart.
While investors likely recognize the opportunity India and Flipkart create for WMT stock, e-commerce is just the tip of the iceberg in India. KeyBanc analyst Edward Yruma says Flipkart’s digital payment arm PhonePe could be an under-the-radar gold mine for Walmart’s international business.
What PhonePe Means For WMT Stock
PhonePe is a unified payment interface-based app that has enabled more than two billion transactions and sports more than 150 million users. Basically, PhonePe allows Indian users to send money to each other digitally. Yruma says India is just now beginning to transition meaningfully from a cash-driven economy to an online one. KeyBanc estimates digital payments in India will more than double from $65 billion to $135 billion by 2023. That growth represents more than a 20% annual rate.
The growth will be driven by India’s population of more than 440 million millennials, more than the entire population of the U.S.
Since acquiring PhonePe as part of the Flipkart deal, Walmart has already used what it has learned from the acquisition to launch a digital payments wallet in Mexico called Cashi. In just over a year since Walmart acquired Flipkart, PhonePe’s valuation has skyrocketed. When Walmart initially took a 77% stake in Flipkart last year, PhonePe was valued at about $1.5 billion. However, recent reports suggest PhonePe could soon begin an additional fundraising round valuing it at more than $10 billion. It’s worth noting that Walmart paid just $16 billion for all of Flipkart.
How Much Is PhonePe Worth?
Yruma estimates PhonePe could drive more than $50 billion in total payment volumes (TPV) this year alone. Those volumes include point-of-sale transactions, peer-to-peer payments and other digital wallet transactions.
KeyBanc is projecting PhonePe’s TPV will grow 40% to around $70 billion in 2020. In terms of valuation, PayPal (NASDAQ:PYPL) is currently valued at roughly 0.16x its 2020 TPV. Yruma assumes a slight 0.20x TPV valuation premium for PhonePE given its high-growth runway. Based on that multiple and between 35% and 45% annual growth, PhonePe could already be valued at roughly $14 billion to $15 billion.
“We peg the medium-term valuation at $14B given PhonePe’s rapid growth and the secular tailwind from the shift to digital payments in India and the potential for international expansion,” he said.
How WMT Stock Is Benefiting From Amazon
Amazon has been the evil villain for most U.S. retail companies in the past decade, including Walmart. However, given Walmart has invested so heavily in keeping pace with Amazon, it is also now also benefiting from the same share gains from the brick-and-mortar space. PhonePe is just one example of an acquisition that Walmart may never have made if not for pressure from Amazon.
Walmart plans to begin testing a service for grocery delivery to customers when they are away from home. Walmart employees will delivery food straight into at-home refrigerators and will stream video of the process to customers. That sounds more like an Amazon idea than a Walmart brainstorm.
WMT stock is also benefiting from the string of bankruptcies and store closings of retailers that can’t compete. Sears is a shadow if its former self. Toys R Us and RadioShack are just two other examples of competitors that bit the dust. Sure, Amazon is gaining much of that lost business. But Walmart is also luring some of those displaced customers as well.
Bottom Line on Walmart Stock
Walmart stock investors are getting a lot more bang for their buck today than they were a decade ago. Walmart stock is not just an investment in a U.S. discount store anymore. Thanks to pressure from Amazon, Walmart has been forced to invest heavily in modernizing its business for the next generation of retail.
U.S. same-store sales and online sales may continue to capture the headlines for WMT stock in the near-term. However, PhonePe’s valuation is exploding. Long-term investors may not be overlooking the digital payment platform for much longer.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.