After months of rumors, Walmart Inc (NYSE: WMT) confirmed on Wednesday that it will be investing $16 billion in a 77 percent majority ownership stake in Indian e-commerce leader Flipkart.
Walmart stock initially traded down by more than 3.3 percent following the news, but Walmart management says the deal is the best way for the company to tap the high-growth Indian market.
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Walmart says the long-term plan for Flipkart is to make the company a publicly-listed subsidiary. Walmart has been targeting the Indian market for years after Amazon.com ( AMZN) expanded into India five years ago. Flipkart reportedly has more than 100 million users, and Walmart said it expects the Indian e-commerce market to grow four times as fast as the overall retail market in coming years. According to market research firm Forrester, there were $21 billion in online sales in India last year. Amazon had reportedly also been interested in a potential bid for Flipkart.
“India is one of the most attractive retail markets in the world, given its size and growth rate, and our investment is an opportunity to partner with the company that is leading transformation of e-commerce in the market,” Walmart CEO Doug McMillon says in a statement.
Investors initially balked at Walmart’s guidance that the deal would reduce 2019 earnings per share by between 25 and 30 cents if it were to close by the end of the fiscal second quarter. Walmart is already dealing with earnings pressures due to heavy investments in its domestic e-commerce and delivery services, as well as pricing competition from Amazon and other competitors.
Morningstar analyst John Brick says Walmart’s recent international deals in the U.K., China and India are positioning it well to expand its business into key global markets.
“Although this is just a mid-single-digit percentage of sales, Walmart appears to be well positioned to compete in the Chinese market with its recently inked JD.com ( JD) and New Dada partnerships,” Brick says.
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He says these efforts and other e-commerce initiatives will eventually pay off for investors. “We expect [Walmart] can increase online sales by 30 percent a year over the next three to four years,” he says.
Morningstar has an “undervalued” rating and $91 fair value estimate for WMT stock.
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Walmart Inc (WMT) Goes All-In on India With Flipkart Investment originally appeared on usnews.com
