Walmart (NYSE:WMT) has invested a couple of billion dollars in its e-commerce business, and the business has expanded meaningfully for a couple years, providing a positive catalyst for Walmart stock.
But WMT is still losing money on its e-commerce effort, according to a report released by the tech website Recode. Between that report and the impressive-but-uncomfortable 30% gain of Walmart stock price so far this year, surely now — rather than later — would be the time to escape from the trap that is Walmart stock.
But there’s a reason WMT stock didn’t even flinch following the release of the report, and the rapid-fire repetition of its premise. That is, it may or may not be true, and even if it is true, it may or may not matter.
For current and prospective owners of Walmart stock that missed it, roughly a week ago, Recode (now under the Vox umbrella) posted a commentary suggesting that Walmart’s online business was on pace to lose more than $1 billion this year.
Recode also reported chatter which suggested that at least one of the premium brands Walmart recently acquired to laterally expand its online offerings — probably Modcloth, according to “sources” — will be sold. It’s possible that more than one will be shed, the website added. It appears that several of these recently acquired assets are still bleeding money, rather than adding to the reported per-share earnings of WMT stock.
The Recode commentary, written by Jason Del Ray, seemed reasonable enough. Indeed, the reported revenue outlook of between $21 billion and $22 billion for WMT’s digital business this year sounds about right. It’s going head-to-head with the venerable Amazon.com (NASDAQ:AMZN), which already enjoys an overwhelming dominance of North America’s online shopping market. Stealing a piece of that business with a mostly nascent digital effort is neither going to be easy or cheap for WMT.
But Recode’s take arguably mischaracterized the value of Walmart’s digital arm to the company as a whole.
Nothing Out of the Ordinary
Chief among the missed points is that the online business’ main purpose isn’t turning a profit, but rather, bringing consumers deeper into the Walmart ecosystem where they can, at least eventually, be monetized in different ways, thereby boosting Walmart stock price.
To that end, at least some of WMT’s online orders are drawing people into its stores, where they may make additional purchases, since they’ve already stepped foot in the building. The company has built giant parcel pickup towers at several hundred stores, and appears to have perfected the art of getting its products into customers’ hands quickly and efficiently.
Also lost in the discussion is that WMT’s primary rival, Amazon, grew to enormous proportions during its first two decades of existence, but didn’t actually start to see consistent profits from its e-tailing business until more than 15 years after its inception. For several years, and to this day, Amazon’s cloud computing arm is driving the lion’s share of its earnings.
It could, and likely will, take Walmart a similar amount of time to fine-tune its digital unit into a profit-making machine that helps drive the Walmart stock price decidedly higher.
And for the record, Amazon has had its fair share of misguided acquisitions and product developments that had to be undone. It recently (though possibly only temporarily) shut down its prepared-meal delivery arm Amazon Restaurants, and in 2017 it finally shuttered diapers.com. WebPay and Amazon Destinations are a couple more projects that ultimately failed to pay off, and were eventually mothballed.
Buying and selling different businesses is all just part of the process.
The Bottom Line on Walmart Stock
Don’t misread the message. Walmart’s e-commerce arm likely is losing money, and likely will be forced to let go of one or more of its recently purchased, high-end brand names. The project probably won’t be profitable for several more years, even if the retailer is able to squeeze in some indirect benefits from operating online.
It’s also very likely that WMT stock is going to enter a pullback phase in the very near future.
There’s a reason owners of Walmart stock gave the Recode article its due attention and then shrugged it off, however. That is, nothing in the report was really surprising, since WMT’s online business is effectively only a couple years old. Investors also kept things in perspective as far as Walmart stock is concerned. While $1 billion isn’t chump change, this is a company that earns several billion dollars’ worth of income per year. It can afford to continue running online experiments while it finds the right formula.
The market gave Amazon stock the benefit of the doubt for nearly a couple of decades on nothing more than a promising future.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.