Wal-Mart: Will Innovation Pay Off Against Amazon?

Ramping Up E-Commerce

Recognizing the existential threat posed by Amazon.com (AMZN), the online retailing juggernaut Wal-Mart (WMT) has been attempting to ramp up its online presence through a slew of acquisitions. In Aug. 2016, the company began its campaign with its acquisition of Jet.com for $3 billion as well as 300 million shares of Wal-Mart stock. This provided Wal-Mart with access to Jet's smart cart technology.

Since that time, Wal-Mart has been on an acquisitions spree. On March 21, 2017, Jet.com bid between $50 to $75 million to acquire Modcloth.com, which is a 15-year-old online retailer of vintage-inspired women's clothing. On Feb. 13, Wal-Mart acquired Moosejaw for $50 million, an outdoor retailer that holds brands such as North Face and Patagonia. The company also acquired Shoebuy.com on Jan. 5 for $70 million from InterActiveCorp (NASDAQ:IAC). Jet.com also acquired Hayneedle for $90 million in February 2017, which is a furniture retailer.

All of the acquisitions that Wal-Mart and Jet.com have recently made are aimed at increasing Wal-Mart's online presence and enabling it to more effectively compete against Amazon.com.

Store No. 8: Wal-Mart's New Incubator

Part of Wal-Mart's drive towards better e-commerce involves a number of high-tech projects. Recently, Wal-Mart established an incubator it calls Store No. 8. The technology incubator is meant to help fund startup companies in the areas of artificial intelligence, emerging technologies and autonomous vehicles. The company reports that it views it as investing in the future of retail so that Wal-Mart might participate in the evolving nature of shopping. The focus of its investment arm is to identify emerging technologies that Wal-Mart can find useful in the furtherance of its online and physical retail presence.

Investments Paying Off?

Wal-Mart's operating margins have shrunk to 4.8% for the last twelve months, much below its historical average. In addition, inventory turnover has also slumped, indicating Wal-Mart has been holding on to inventory longer. We're concerned that these acquisitions have pressured Wal-Mart margins, without increasing top line growth. The majority of analysts seem cautious as well and continue to value Wal-Mart as a Hold.

Simultaneously, Amazon's own startup incubator has received wide recent acclaim -- and could potentially vault its CEO Jeff Bezos to the richest person in the world.

Recent stock movement

Wal-Mart's 52-week range is $62.72 to $75.19.

 

WMT trades at a P/E of 15.7, which is just slightly below the industry average of 16.9.

Conclusion: Hold Off

Wal-Mart is making appropriate steps to try to ramp up its online presence, and corporate venture capital is certainly a hot topic at present; but it all remains to be seen if these investments are too little too late.

Amazon.com has established such an overwhelming presence in the e-commerce universe that it is difficult to see what entry point Wal-Mart might have.

Until we see better proof of Wal Mart's investments paying off, we recommend investors avoid the stock.