Market Mad House

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

Grocery Wars

Why Walmart wants TikTok

The strange news of the past week was Walmart wants TikTok. To explain, Walmart (NYSE: WMT) wants to join Micorsoft’s (NASDAQ: MSFT) bid for TikTok.

“We believe a potential relationship with TikTok U.S. in partnership with Microsoft could add this key functionality and provide Walmart with an important way for us to reach and serve omnichannel customers as well as grow our third-party marketplace and advertising businesses,” a 27 August 2020 Walmart (WMT) press release speculates.

TikTok is the ByteDance Ltd owned video social media app President Donald J. Trump (R-Florida) brands “a national security risk.” Consequently, Trump is threatening to shut TikTok’s US operations down on 15 September 2020 unless ByteDance sells it to an American owner.

Walmart’s Ecommerce Success

I think Walmart wants to integrate TikTok’s social media capabilities with its ecommerce operations. Walmart’s ecommerce assets online include marketplace and Walmart Pay.

Walmart is successful in ecommerce. In fact, Walmart claims its US ecommerce sales grew by 97% in 2nd Quarter 2020. Digital Commerce 360 claims Walmart’s marketplace offers over 75 million products.

In addition, Walmart’s store pickup and delivery services have grown by 30% since February 2020. Impressively, Walmart’s US grocery sales grew by $3 billion in 2nd Quarter 2020 and $8 billion in 2020, Walmart US CEO John Furner claims.

Why Walmart is interested in TikTok

Conversely, Walmart could not replicate Amazon’s (NASDAQ: AMZN) technological splash or hold on the popular imagination.

Walmart is trying to avoid its partial online failure with an aggressive social push. Walmart did not go online early enough, allowing Amazon to dominate that sphere.

For example, Walmart is the third largest US ecommerce brand with 294.5 monthly visits in July 2020, Dishold estimates. In contrast, Amazon, the number one of US ecommerce attracted 2.012 billion visits.

I think Walmart’s executive team thinks they can avoid a repeat of the Amazon (AMZN) mistake in social media. To that end, a TikTok partnership could help Walmart establish a large social media presence.

The TikTok users Walmart Wants

Notably, TikTok claims to have 100 million U.S. users. Walmart wants to put and Walmart pay before those users.

Moreover, users downloaded TikTok over two billion times, Sensor Tower estimated on 28 April 2020. Users downloaded TikTok 315 million times in first quarter 2020.

Additionally, Adweek claims TikTok brought in 39.2 million U.S. users over 18 in April 2020. That number grew from 28.8 million over-18 US users in March 2020 and 23.2 million U.S. users in January 2020. In addition, TikTok had 12.6 million U.S. users over 18 in April 2019.

I think the US TikTok users over 18 are the people Walmart wants. To elaborate, those are people old enough to have homes, credit cards, and bank accounts and buy stuff. The TikTok user Walmart wants is the 25-year-old with a job, a bank account, and a credit card and limited income.

Is TikTok the new Facebook?

Tellingly, the percentage of US TikTok users between 18 and 24 fell from 4.11% in January 2020 to 35.3% in April 2020, Comscore estimates. Meanwhile, the percentage of 25 to 34 year-olds on TikTok rose from 22.4% to 27.% and the percentage of 35-44 year-olds on TikTok rose from 13.9% to 17.1%

Walmart does not want TikTok because teenagers are using it. Instead, Walmart wants TikTok because the teenagers’ mothers, aunts, and older sisters are using it. To elaborate, mom, aunt, and older sister have money to shop. The teenager does not.

I think Walmart’s management has calculated that TikTok could be the new Facebook (NASDAQ: FB). To explain, I think most brick and mortar retailers; including Walmart, missed the boat on Facebook.

The managers in Bentonville failed to notice that shoppers were looking at Facebook instead of newspapers and broadcast television. However, today’s Walmart managers see that shoppers are looking at TikTok instead of Facebook. Consequently, they want in on TikTok at the beginning.

Is Walmart Making Money?

Walmart (WMT) is making enormous amounts of money. For example, Walmart reported quarterly revenues of $137.742 billion on 31 July 2020.

Walmart made $35.053 billion in quarterly gross profits from those revenues. Impressively Walmart’s quarterly gross profits grew from $32.596 billion on 30 April 2020 but fell from $33.923 billion on 31 January 2020. In 2020, Walmart’s quarterly revenues fell from $141.671 billion on 31 January to $134.622 billion on 30 April 2020.

 Conversely, Walmart’s quarterly operating income grew from $5.322 billion on 31 January 2020 to $5.244 billion on 30 April 2020 to $6.059 billion on 31 July 2020. However, Walmart’s quarterly common net income went from $4.141 billion on 31 January 2020 to $3.99 billion on 31 March 2020 to $6.476 billion on 31 July 2020.

Walmart Generates Enormous Amounts of Cash

Walmart (NYSE: WMT) generates enormous amounts of cash. For example, Walmart reported a quarterly operating cash flow of $11.939 billion. That operating cash flow rose from $7.017 billion on 30 April and fell from $10.716 billion on 31 January 2020.

However, Walmart reported a quarterly ending cash flow of just $1.969 billion on 31 July 2020. That ending cash flow fell from $14.985 billion on 30 April 2020 but rose from $884 million on 31 January 2020.

Consequently, Walmart had $16.906 billion in cash and short-term investments on 31 July 2020. That number rose from $14.93 billion on 30 April 2020 and $9.465 billion on 31 January 2020.

Walmart could turn TikTok into a money Machine

Thus, Walmart is a cash-rich company that is generating cash. Hence, I think Walmart could transform TikTok into a money machine.

For example, a customer could shop at Walmart via TikTok. The customer could click on the products in TikTok, pay for the products with Walmart Pay in TikTok and pick them up at Walmart’s self service delivery tower. Or the customer could have the products shipped to her home through FederalExpress (NYSE: FDX).

In particular, customers could see products such as clothes, electronics or tools on TikTok before they order them. Then order and pay for the products on TikTok. Hence, Walmart could market products to customers coronavirus is trapping at home.

Thus, Walmart management could assume that TikTok is the new television for the middle class. To explain, Walmart managers think today’s soccer mom will to TikTok for her products ideas, just as her mother and grandmother looked to television.

Hence, another reason Walmart wants TikTok is as a replacement for television. In fact, the most watched US television network Viacom’s CBS (NASDAQ: VIAC) attracted just 7.58 million viewers in May 2020 in a nation with a population of 331 million, Nielsen estimates. Additionally, CBS’s viewership fell 15% from 2019, Nielsen estimates.

Walmart is a Great Value Investment

Given these numbers, I think television is no longer a viable advertising medium and Walmart agrees. Hence, I consider Walmart (WMT) a great company with a good management that understands how its market is changing.

Thus, I think Mr. Market undervalued Walmart (NYSE: WMT) at $147.59.19 on 1 September 2020. Moreover, Walmart will pay a quarterly dividend of 54₵ on 8 September 2020.

That dividend rose from 53₵ on 2 January 2020. gave Walmart a dividend yield of $2.16 and a dividend yield of 1.58% on 31 August 2020.

In the final analysis, I think Walmart is a great value investment in brick and mortar retail that could get far better with TikTok. Anybody who wants a cash-rich stock with growth potential, a high margin of safety, and a dividend needs to examine Walmart.