Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Why Walmart is a Great Contrarian Play

Walmart Stores Inc. (NYSE: WMT) might be the greatest contrarian play in the US stock market right now. The financial numbers tell us that world’s largest retailer has a lot going for it, even if Mr. Market seems to hate it.

Some reasons why Walmart is a great contrarian investment include:

  • Walmart is undervalued. On August 1, 2016; the discount behemoth had a market capitalization of $229.88 billion, and an enterprise value of $265.62 billion.


  • Walmart generates an incredible amount of revenue; it reported revenues of $483.21 billion on April 30, 2016. That makes it over four times the size of Costco Wholesale (NASDAQ: COST); which reported revenues of $117.94 billion on May 31, 2016, and over five times the size of Target (NYSE: TGT) which reported revenues of $72.86 billion on April 30, 2016.


  • The sheer size of Walmart’s revenue gives it a huge moat; which no retailer has been able to breach. Walmart’s revenues are more than four times of Amazon (NASDAQ: AMZN); which reported revenues of $113.42 billion on March 31, 2016. My calculation is that it would take around 20 years for Amazon’s revenues to match Walmart’s at the present rate of growth. Amazon had $6.41 billion in revenues during first quarter 2016; rising from $107.01 on December 31, 2016 to $113.42 billion on April 30.


  • That moat is growing slightly; Walmart reported revenues of $483.13 billion in January 2016 – that grew to $483.12 billion, in April 2016.


  • The revenues of some of Walmart’s competitors are declining. Target’s revenues fell by $920 million during first quarter 2016 dropping from $73.78 billion in January 2016 to $72.86 billion in April.


  • Walmart makes a lot of money from its sales on April 30 it reported a net income of $14.43 billion; cash and short-term investments of $7.597 billion, $29.14 billion in cash from operations and a free cash flow of $3.984 billion.


  • All that cash gives Walmart a tremendous amount of float for a retailer.


  • Walmart is also very profitable company it reported a profit margin of 2.66% on April 30, 2016.


  • Walmart investors are still making money. The retail giant rewarded shareholders with a dividend yield of 2.68% and a return on equity of 18.47% on April 30, 2016.


The financial numbers provided by ycharts alone make the contrarian case for Walmart but there is even more. Despite its reputation, Walmart is a very innovative and flexible company that is taking advantage of some exciting opportunities for growth.

Walmart as a Contrarian Financial Play

Strangely enough, Walmart might be a good contrarian financial play. It has some resources to might generate large amounts of revenue via financial products including:

  • Walmart Pay – the digit-wallet app; which uses QR code technology. A Walmart press release stated that use of the app increased by 45% during its first week of use. Walmart Pay is a potential cash cow because Ant Financial; the Alibaba Holdings’ (NYSE: BABA) spinoff that operates Ali Pay, has an estimated value of $60 billion.


  • Financial Services offered through the Walmart Money Centers. The big opportunity with Walmart Pay is the Walmart Money Centers; which offer a wide variety of financial services including check cashing, money transfer, money orders and the Walmart Money Card. Integration of the app with the money centers would give Walmart its own payment ecosystem rivaling Ali Pay.


  • Such financial services are a potential cash cow; the US Postal Service’s Inspector General estimated that post offices sold $21 billion worth of money orders that generated $159 million in revenue in 2015.[1]


  • The profit margin on a US Postal Service Money Order in 2016 was 35% according to the Inspector General.[2]


  • The digital app may allow Walmart to enter the lending arena. Ant Financial loans money to up to 20 million small businesses in China. PayPal’s small business lending had reached a volume of $3 million a day in November 2015, Forbes reported.[3]


Walmart as an Online Retailer

The best known contrarian opportunity for Walmart is in ecommerce. Despite all the criticism Walmart’s ecommerce efforts have a lot to commend them including.

  • Walmart was the fourth largest e-tailer in the United States with $13.7 billion in sales in 2015. Only Amazon, Apple Inc., and Dell were larger according to Statista.[4]


  • Walmart was the largest brick and mortar retailer in the ecommerce space in the United States – if you ignore the Apple and Amazon stores.


  • Walmart’s online sales were nearly over six times those of Target in 2015. Target’s retail sales were just $2.51 billion in 2015 according to Statista.[5]


  • Walmart’s online sales are nearly three times those of Costco; which reported $4.47 billion online sales in 2015.


  • Walmart’s ecommerce sales grew by 12% in fiscal 2016.


  • Walmart has integrated with its brick and mortar stores offering free pickup on items ordered online at any store.


  • Walmart Shipping Pass offers unlimited two-day shipping for a year for $49.99. The company is also offering a free 30 day trial. I’ve tested out the service and it works pretty smoothly. There were delays at first but lately it seems to be working as advertised.


  • Walmart is experimenting with same-day delivery. Its effort involves the testing of Uber; Lyft and a company called Deli, for same-day grocery delivery.

Expanding Technological, Online and Brick and Mortar Footprint

Finally I like Walmart as a contrarian growth play. Some of Walmart’s growth prospects include:

  • The Neighborhood Markets, smaller US stores. Sales growth at these stores increased by 7.1% in the last quarter, Market Realist reported. Walmart opened 146 Neighborhood Markets last year; and plans to open another 85 to 95 in fiscal 2017.[6]


  • Supercenters Walmart plans to open 50 to 60 new or remodeled supercenters in fiscal 2017.


  • Walmart plans $11 capital investments in 2017.[7]


  • Walmart plans to invest $1.1 billion in e-commerce and digital initiatives in fiscal 2017.


  • Walmart has launched Walmart Labs its digital technology research and development effort. Walmart Labs is headquarter in San Bruno, California, but has operations in Sunnyvale and Carlsbad, California; Bangalore, India, Portland, Oregon and Sao Paulo, Brazil. This makes Walmart an interesting contrarian play technology play.


  • Walmart has launched a $20 billion two-year share repurchase program to boost its stock price.


All this makes Walmart a fascinating contrarian play. This company is obviously is not for everybody; because of its size and complexity, but it has a lot of potential. If you are looking for something like Amazon; that’s a lot cheaper, Walmart is certainly worth a look.





[5] See above.