Walmart (WMT) is moving to strengthen its advertising and media business to compete with Amazon Prime (AMZN).
The company on Tuesday confirmed plans to acquire smart TV maker VZIO for $2.3 billion, or $11.50 per share. Experts say the move will accelerate the company's retail media business, Walmart Connect, whose fourth-quarter sales in the U.S. rose 22% from a year earlier.
Walmart's stock price rose 3% in afternoon trading Tuesday following the company's quarterly results and transaction announcement. Vizio's stock rose more than 15%, while rival Roku (ROKU) fell nearly 7% as investors speculated that its streaming technology efforts would lose market share.
America's largest retailer has made it clear that it sees Vizio as a big part of its data and advertising power.
”[Advertising] It's a fast-growing, high-margin part of the company's business, John David Rainey, Walmart's chief financial officer, said Tuesday on Yahoo Finance Live (video above). “And this deal with Vizio is very complementary to what we were doing organically. This allows us to use our operating system to actually serve our customers better, We will be able to offer new channels to connect with our customers with data.”
Wedbush analyst Alicia Reese wrote in a note to clients before the announcement that the acquisition represents a “huge opportunity” for Walmart. One reason for this is that Walmart will be able to “leverage TV viewing data” to market its products across its ecosystem.
Joe Feldman, senior managing director at Telsey Advisory Group, said that as Walmart looks to grow its ecosystem, particularly its membership platform Walmart+, and compete with Amazon, consumer data is “Very valuable,” he said.
Walmart is “trying to build something like Amazon Prime, and this could be a way to do that,” Feldman continued.
Oliver Chen, senior research analyst at TD Cowen, agreed, telling Yahoo Finance Live that “digital advertising is the future of Walmart.” He emphasized that TD Cowen believes the profit margins on digital advertising are more than 70%, making Walmart a “tech company” rather than just a large retailer.
Reese said Walmart may also offer direct e-commerce sales on its connected TV platform as consumers continue to cord-cut, which he said is also a key area for growth.
“There is a market opportunity in third-party sales, and there is also a huge digital advertising opportunity,” Chen said. “Vizio Connect will help make this possible, given that he uses the SmartCast system, an operating system that already has around 18 million members.”
As for Vizio, Laura Martin, a media analyst at Needham & Company, downgraded the stock to a “hold” rating, but believes there are no further bidders, and the deal is a good deal for Vizio. He said it was a win-win.
Martin likes the deal. That's because it's at a premium compared to Vizio's stock price, which was $7.40 before the acquisition rumors. As of Tuesday afternoon, the stock was trading near $11 per share.
Under CEO Doug McMillon's leadership, Walmart has taken on some risk with acquisitions such as Jet.com (ultimately discontinued), Flipkart (not yet profitable), and Moosejaw and Bonobos (later resold). I have a bad track record.
This could be another example of Walmart's “obvious interest in learning and growing its digital capabilities.” [being] Feel free to take the flyer,” JPMorgan analyst Chris Horvers wrote in a note to clients.
Despite the increased scrutiny on M&A deals, Horvars doesn't think the deal raises antitrust concerns. He said that “consumer electronics is one of the most competitive markets in the world,” and that Walmart's private label TV brands “lack the market share of the likes of Samsung, TCL and LG.”
Mr. Martin, like Mr. Rainey of Walmart, agreed that the deal would be subject to regulatory approval.
“We operate in a complex and highly regulated environment,” Rainey said on Yahoo Finance Live. “We think this transaction makes a lot of sense and will ultimately allow us to better serve our customers.”
It can also have a lasting positive impact on a company's bottom line.
Stifel managing director Mark Astrachan said in a note to clients that Walmart Connect and Digital Media's gross margins are significantly higher than the company average, “providing revenue flexibility.” Stated.
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