A subscription service creates multiple catalysts for Walmart stock.
Stocks have bounced back impressively from their March lows, and Walmart (ticker: WMT) is among those that recently hit all-time highs. Walmart has aggressively invested in its online and omnichannel offerings, putting it in position to join Amazon.com (AMZN) in gaining market share from retailers that are slow to modernize their businesses. Walmart’s latest move to capture the next generation of shoppers is Walmart+, a subscription service response to the popular Amazon Prime, reportedly launching in July. Morgan Stanley analyst Simeon Gutman recently discussed 10 reasons to love Walmart stock ahead of the Walmart+ launch.
The market loves Walmart+.
Rumors of a Walmart subscription service — offering unlimited delivery and discounts — started in February, and the market seems to love the idea. Since the first report that Walmart could be launching its own version of Amazon Prime, WMT stock is up about 20% and recently reached all-time highs. Gutman says the market has clearly assigned value to a subscription model even though the program has not been officially announced. Walmart+ reportedly will cost $98 per year, making it cheaper than Amazon Prime at $119. The market has added more than $60 billion to Walmart’s market cap since the February rumors surfaced.
Now is the perfect time for Walmart+.
Gutman says there are outside factors that make 2020 the perfect time to launch Walmart+. The valuations of online retailers have broken out to the upside thanks to brick-and-mortar store closures. Amazon, Chewy (CHWY) and Wayfair (W) are just three examples of online retail stocks achieving all-time highs in recent months. Rising tech stock valuations have lifted any companies that are embracing and investing in technological innovations. Retail investors looking for a safe haven amid the chaos are turning to stocks with clear catalysts, and the Walmart+ launch fits the bill perfectly.
There are fewer bigger retail winners.
Regardless of industry or stock, Gutman says this theme is playing out over and over again in 2020. Market share, revenue growth and stock performance are concentrated more among the top handful of stocks in each group. At this point, the five largest companies in the S&P 500 make up nearly 25% of the index’s market capitalization. Gutman estimates the top 10 retailers in the market are on track to capture 35% market share in 2020, up from 30% in 2019. Walmart is among the handful of retailers actually gaining share and growing revenue.
The unlimited delivery math is favorable.
Walmart launched a program called Delivery Unlimited in 2019 that offers unlimited grocery delivery. Today, that service is available in 1,850 stores for $98 annually. Gutman estimates that 6.7 million Walmart customers are eligible to subscribe to Delivery Unlimited. He figures that Walmart has a sample size of at least 270,000 Unlimited subscribers to use to crunch the numbers and be comfortable with the overall economics of Walmart+ before the launch.
Recurring revenue is high-quality revenue.
There’s a good reason why so many companies are transitioning to a subscription model. Recurring revenue, or sales that are automatically generated on a monthly basis, is highly reliable. Gutman says many customers who subscribe to Walmart+ and pay the upfront fee will likely renew the service automatically each subsequent year. Subscription models and loyalty programs also encourage customers to shop more to benefit from their fee, and Gutman says that extra shopping is a win-win for both Walmart and Walmart+ subscribers. Essentially, Walmart+ could significantly boost the lifetime value of many Walmart shoppers.
Walmart has a free pass to invest.
One of the difficulties facing the brick-and-mortar retail sector is that large investments are required to properly digitize a business, but the market has been unwilling to tolerate declining operating margins. Gutman says investors in Amazon, Netflix (NFLX) and other subscription services were patient during the profitless growth periods on the expectation that those companies would eventually be able to switch on the profits. Gutman says Walmart+ may help Walmart change the narrative surrounding its stock by allowing the company the freedom to invest and opening the door to earnings multiple expansion in the future.
Walmart has multiple omnichannel levers.
Gutman says Walmart’s grocery business would be the biggest draw for potential Walmart+ customers. Walmart can provide discounts or special services at its grocery stores, and it has click-and-collect and delivery options as well. Gutman says he is confident Walmart will also include its health care and pharmacy businesses in Walmart+, which could be a game changer for the service. Finally, Walmart could choose to use its gas stations and even potentially bundle Sam’s Club memberships into Walmart+.
Walmart has wallet share and lifetime value opportunities.
Gutman says the economics of Walmart+ certainly seem appealing on paper. He says the service will likely cut into earnings upfront, given it will require heavy investment. However, the true value in Walmart+ will not come from the subscription revenue but rather from the increase in Walmart’s wallet share of customers and the total lifetime increase in each customer’s value. Gutman says the average U.S. household spends more than $8,000 per year on groceries, so Walmart+ would need to initially capture only a small market share to make a meaningful impact.
Earnings multiple expansion requires growth.
In the past decade, Walmart’s earnings multiple has grown more than 90% to about 25 due to the company’s pivot to e-commerce. Gutman says Walmart will need to accelerate its revenue growth for the stock to expand its earnings multiple from current levels. In the past few years, Walmart’s overall U.S. revenue has grown at around 3.5% annually, but its digital sales have risen at about 40% per year. If Walmart+ could help drive a higher overall growth rate for the company, investors may reward Walmart with an earnings multiple closer to higher-growth tech stocks than retail peers.
Walmart has a favorable risk-reward skew.
Gutman says every stock has a bull-case scenario and a bear-case scenario. While Walmart+ doesn’t eliminate the bear-case scenario for Walmart, it shifts the risk-reward balance toward the bull case. Massive government stimulus programs and 0% interest rates have created a favorable economic backdrop if the health crisis eventually dies down. Gutman says the bull case for Walmart hinges on the company’s ability to further penetrate the e-commerce market, increase its online and subscription sales mix and continue to establish its position as one of a handful of winners in the retail landscape.
Why it’s time to buy Walmart stock:
— The market loves Walmart+.
— Now is the perfect time for Walmart+.
— There are fewer bigger retail winners.
— The unlimited delivery math is favorable.
— Recurring revenue is high-quality revenue.
— Walmart has a free pass to invest.
— Walmart has multiple omnichannel levers.
— Walmart has wallet share and lifetime value opportunities.
— Earnings multiple expansion requires growth.
— Walmart has a favorable risk-reward skew.
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10 Reasons to Buy Walmart Stock originally appeared on usnews.com
