This Could Be Huge for WMT Stock
Retail companies like Wal-Mart Stores, Inc. (NYSE:WMT) aren’t exactly the hottest picks in the stock market today. While U.S. equities just soared past their all-time highs, Walmart stock returned a measly 0.9% in the past 12 months. Now, there might be something that could boost the appeal of WMT stock—a potential acquisition of Jet.com Inc.
On Wednesday, The Wall Street Journal reported that Walmart is in talks to buy e-commerce startup Jet.com. While it’s uncertain how much Walmart would be willing to pay for the money-saving e-commerce site, a source familiar with the matter said that Jet.com could have a valuation of up to $3.0 billion. (Source: “Wal-Mart in Talks to Buy Web Retailer Jet.com,” The Wall Street Journal, August 3, 2016.)
This could be a big deal for Walmart stock. In recent years, many stocks in the retail sector have lost quite a bit of their appeal. It’s not because there’s anything wrong with the companies themselves. Rather, it’s because the market was worried about the booming e-commerce industry.
More and more consumers are shopping online these days. When you can get household items, clothing, and even fresh groceries from Amazon.com, Inc. (NASDAQ:AMZN), why bother going to a physical store?
Indeed, Amazon’s growing e-commerce empire poses a serious threat to companies like Walmart. If traditional retailers don’t find ways to catch up, they could become obsolete as more transactions move to online channels.
Fortunately, Walmart is probably not going to be the retail giant that gets left behind. In fact, even before the news broke, the company was making solid progress in expanding its presence in the e-commerce industry.
In the first quarter of 2016, Walmart’s e-commerce sales grew seven percent year-over-year on a constant currency basis. Gross merchandise volume (GMV) increased by 7.5%. (Source: “Management Earnings Call Transcript,” Wal-Mart Stores, Inc., May 19, 2016.)
The company now offers more than 10 million stock keeping units (SKUs) on Walmart.com and is growing that number through both first-party and third-party items. However, Walmart’s president and chief executive officer, Doug McMillon, said that “growth here is too slow.” (Source: Ibid.)
Buying Jet.com could give a big boost to Walmart’s e-commerce business. The retail giant could get hold of Jet’s sophisticated pricing algorithm, warehouses, and customer data.
Note that Jet.com was launched just over a year ago, and has already built a solid brand for itself. Started by Diapers.com founder Marc Lore, Jet.com is challenging Amazon by offering lower pricing on its products.
The main difference between Jet.com and e-commerce sites like Amazon.com is the pricing algorithm. Products on Jet.com are priced based on their locations in distribution centers. If you purchase multiple items located in the same distribution center, their prices are lower than if they are located in separate distribution centers. If you are willing to waive the right to return an item, the price gets lowered. If you use a less expensive form of payment, such as paying with a debit card rather than a credit card, the price goes down further.
Despite being the new kid on the block, Jet.com has attracted some high-profile investors, including mutual fund Fidelity Investments and Wall Street giant Goldman Sachs Group Inc (NYSE:GS). Jet.com has raised more than $500 million in equity funding and was last valued at $1.4 billion. (Source: “Jet.com,” The Wall Street Journal, last accessed August 3, 2016.)
The Bottom Line on WMT Stock
Of course, this isn’t a said-and-done deal. The companies are still in talks and it’s unclear if Walmart would make an offer acceptable to the e-commerce startup. Moreover, Jet.com has projected that it would burn through hundreds of millions of dollars in its first few years in order to bring customers to its web site. Whether Walmart is willing to take that risk is uncertain. (Source: “Facing Cash Crunch, Retailer Jet.com Racing to Complete Funding Round,” The Wall Street Journal, November 4, 2016.)
At the end of the day, even if the companies’ management reaches an agreement, the deal would need to be approved by Walmart stock investors. Right now, Amazon’s expanding e-commerce empire is perhaps the biggest threat to the retail giant. If Walmart can boost its presence in online retail through an acquisition, it could be massive for WMT stock.