Will Amazon.com, Inc Stock (AMZN) Come Under Pressure From Wal-Mart?

  • Walmart stock was down 3.3% after the company announced a softer guidance.
  • Walmart has upped the ante in the eCommerce game, with plans to take on Amazon.
  • Will recent moves by WalMart hurt the Amazon growth story?

The shares of retail stores giant Walmart stores, Inc. (NYSE:WMT) were down by more than 3% yesterday after the company announced a soft guidance during its Analysts day conference. Walmart has also announced that it will increase the focus of its investment from brick and mortar to eCommerce which is likely to grow at a much faster pace in coming years. The company has made multiple forays in the eCommerce business which is currently dominated by Amazon.com, Inc (NSDQ:AMZN) and Alibaba (NYSE:BABA), but without any significant results. eCommerce contributed less than 5% of Wal-Mart's total revenues.

In a release, Wal-Mart announced EPS guidance which was below analysts estimates. Wal-Mart expects its 2017 adjusted EPS to be around $4.25 against the analysts' estimates of an EPS of $4.34. Further, it expects 2018 EPS to remain flat in comparison to 2017. The company also cut the projected super stores opening in 2018 to almost half of 2016 openings. The focus is likely to shift to the eCommerce space.

A report by eMarketer shows that eCommerce will continue to grow in high teens till 2020, while retail sales will grow at around mid single digits. eMarketer expects that eCommerce retail spend will increase to $4.058 trillion in 2020, making up 14.6% of overall retail sales, up from current 8%. And Sams Club is keen to have a larger piece of this pie.

The eCommerce Foray

Wal-Mart is not new to the eCommerce game. The company has invested millions in the last 15 years into the eCommerce space. Since 2011, it has bought up about 15 eCommerce startups, including jet.com in August this year. But All these investments have not helped WalMart much with its eCommerce sales growth slowing down. Wal-Mart's sales growth has shown a consistent decline in last two years, while Amazon has managed to increase its sales growth rate despite its huge size. However, in the latest quarter, the eCommerce sales growth picked up to 11%, but it is still well below Amazon's growth rate.

To up the ante, Wal-Mart recently announced the acquisition of jet.com for $3.3 billion. As per the presentation made yesterday, Jet.com had a GMV run rate of $1.2 billion in August, with 210 million unique visitors and 14 million products. But this pales in comparison to Amazon.

To complement its eCommerce strategy Wal-Mart has announced that it will be building 10 large warehouses by the year end, which is pretty aggressive, considering that analysts were expecting it to finish with 8 by next year. Wal-Mart has already invested in technology relating to automatic product sorting and tracking system that is comparable to Amazon's. The opening of large warehouses will help Wal-Mart increase both the speed of service and its reach. To quote Justen Traweek, vice-president of e-commerce supply chain and fulfillment:

"We have doubled our capacity in the last twelve months and that allows us to ship to a majority of the U.S. population in one day,"

But even with this aggressive move, Wal-Mart will remain far behind Amazon which has 40 warehouses of one million plus square feet and plans to open more this year.

Also read: Will Walmart Stores Inc Turn Around Its ECommerce Fortunes With Jet.com?

The International Expansion

Earlier this year, during the summer, Wal-Mart announced that it is selling its eCommerce business in China to JD.com for a stake in the company. Incidentally, Uber has also followed the same strategy when it sold its Chinese business to its local rival Didi-Chuxing in return for a stake in that company. Chinese market appears to be really difficult to crack. Recently Wal-Mart announced that it has doubled its stake in JD.com and will be appointing an observer to its board. With the latest round, the retail giant has upped its stake to almost 10% in the company. JD.com is the second largest player in Chinese eCommerce space which is dominated by Alibaba. China is the largest eCommerce market where eCommerce sales are likely to come in at $899.99 billion this year, almost half of total eCommerce sales in the world. For Wal-Mart to succeed in the eCommerce space, China is a crucial puzzle to solve.

Wal-Mart is also eyeing the Indian eCommerce market, which is one of the fastest growing markets. According to a report in Bloomberg, Wal-Mart is in the process of acquiring a stake in India's largest eCommerce company Flipkart. Wal-Mart is reportedly planning to invest $1 billion in Flipkart, which at its latest funding round was valued at $16 billion. India is likely to be one of the largest eCommerce market after US and China. According to a report by Morgan Stanley, the Indian eCommerce market will grow to $119 billion by 2020. Amazon is also heavily invested in India and expects it to become one of its largest markets outside U.S. Jeff Bezos had recently committed to invest up to $3 billion in India. While Flipkart is currently the largest eCommerce company, Amazon is catching up extremely fast.

Also Read: International Retail Will Drive Amazon.com Inc. Stock Higher

Conclusion

Wal-Mart saw its eCommerce sales growth pick up from 7% in the previous quarter to 11% growth in the latest quarter. With the recent investments, Wal-Mart is on the way to boost its eCommerce presence significantly. Wal-Mart expects 25% of its revenues to come from eCommerce in coming years, up from less than 5% now. But in spite of all these investments, it is unlikely that Wal-Mart will cause any serious damage to Amazon's stock price. In the last fiscal year, Amazon's eCommerce sales came in at $107 billion while Wal-Mart's came in at $13.7 billion. Moreover, Amazon continues to grow at a faster pace than Wal-Mart. It appears that Wal-Mart has still a lot of homework to do.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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