After Walmart bought online shopping site Jet.com in a last-ditch effort to close the gap between itself and Amazon, many investors believed the brick-and-mortar behemoth had made a gamble that would take too long to pay off. That was 2016. Now at the start of Q3 2019, it appears to many that those investors were wrong. Walmart’s stock price is up 53 percent (compared to the 38 percent increase for the S&P 500 over the same time period) and the company’s online U.S. sales rose 40 percent last year. Things are looking good for the company, at least from the outside.
However, the company’s projected losses for 2019 may tell a different story, with multiple sources reporting that Walmart expects to lose more than $1 billion on its U.S. e-commerce side this year despite revenues between $21 and $22 billion. Walmart did not disclose these figures publicly and, so far, has refused to comment on them. It is worth noting that the overall Walmart business still brought in nearly $7 billion in profits last year.
Critics of the Jet.com purchase say Walmart should, essentially, just give up on chasing Amazon. While Amazon holds roughly 38 percent of online-purchase market share, Walmart has just under 5 percent. However, that number has nearly doubled for the retailer since its Jet.com purchase, while Amazon’s share rose from 36 percent to 38 percent over the same period of time. These critics also note that reports of a $1 billion loss may actually place that number far too low and estimate the loss closer to $1.7 billion. They say if Walmart wants to compete online, it will have to stop selling so many “low-margin consumable goods” like groceries and toiletries.
On the other hand, there are plenty of analysts out there who believe a $2 billion loss is entirely acceptable as Walmart works to gain traction in the online space. “Walmart has no other choice but to make these investments if it wants to win over time in both the digital realm and its physical stores,” wrote Yahoo Finance’s Brian Sozzi. He noted that online sales boost in-store sales for the company, which uses its brick-and-mortar locations as physical hubs for delivery and distribution. In fact, the company’s same-store U.S. sales rose 3.6 percent last year while online sales have grown by a consistent 30 percent or more each quarter since the Jet.com purchase.
At time of publication, Walmart shares were valued at $112.72, up from about $61 at the start of 2016.
Tell us what you think:
- Is Walmart making the right move in trying to move into the online shopping space?
- Would you buy shares in Walmart?
- Is there room in the market for an online retailer other than Amazon?
Thank you for reading the Bryan Ellis Investing Letter!
Your comments and questions are welcomed below.