TIP850: Walmart (WMT): From Discount Retailer to eCommerce Powerhouse w/ Kyle Grieve & Shawn O'Malley

SPEAKER_1 (0:00)

You're listening to TIP.

Kyle Grieve (0:03)

Welcome back to The Investor's Podcast, episode 850 Today, we're gonna look at a business in an industry we've largely stayed away from, which is the retail wholesale industry.

Now, Walmart is arguably the most well-known business in all of North America. If you've ever lived here or traveled through, you know exactly what Walmart is. Cheap stuff, lots of selection. You can get pretty much anything you want, from socks to TVs to bananas, all under one roof.

Shawn O'Malley (0:26)

But here is where things get interesting. If you sit down and really think about what Walmart is doing today, it's clear they've added services to help improve their ability to get products to their customers as fast and as conveniently as possible.

Kyle Grieve (0:39)

And that's why I really wanted to dive into this business. The business is doing all sorts of things in eCommerce and memberships that are improving their scale advantages even more, which is super impressive given Walmart's already very large scale.

But I will say, I've had some nagging tension with Walmart pretty much the whole time I was doing my research on this business. Now, it's clear that Walmart is a very good business, but the stock is priced like a tech business inside of the Magnificent 7 So I kept asking myself, is this actually a business worth covering on the show, given how expensive it is?

Shawn O'Malley (1:07)

And I think the answer is most definitely a yes, but maybe not for the reasons you'd think. What I found most fascinating about Walmart is at the market, and lots of institutions seem to see Walmart in a different light from how we think about it. So we want to better understand if there is something we're missing.

SPEAKER_1 (1:26)

Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities.

We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only.

All opinions expressed by hosts and guests are solely their own, and they may have investment in the securities discussed. Now for your hosts, Shawn O'Malley and Kyle Grieve.

Kyle Grieve (2:12)

I want to start this episode by discussing attention I had while making this episode. Walmart is a business that is pretty ubiquitous. I think anyone listening to this who lives in or has traveled North America is going to be very very familiar with Walmart as it's a very very well known American institution. I knew that and I've always wanted to kind of dive into Walmart just to better understand the business itself. Because a lot has changed since Sam Walton was you know flying planes over potential new Walmart locations. But the tension I had had nothing to do with Walmart's quality as a business.

A quick glance at some of their capital efficiency metrics shows a very durable business. And this business has been in retail since 1962 and has scaled significantly since then making it clear that it's a very very good business. So my tension really came from Walmart's stock. So it's a business with a rising price to earnings ratio that at a glance I just don't really think is very well deserved. So as of writing this it's trading on a trailing PE about 38 times.

Now if we were discussing Walmart in its earlier years when it was you know doubling its store count every few years or so, sure I could see that valuation being justified. But as of now with a store count compounding at less than 1% over the past few years, I just found it really hard to figure out if this was a business worth covering on the show.

Shawn O'Malley (3:26)

I remember you voicing some of those concerns to me and telling me it would probably still be a good exercise and doing a case study on really high quality businesses because I do agree with you, Walmart is really as high quality as it gets in some respects and it's had some very good periods where it provided shareholders with credible opportunity to compound returns. But given how much the stock is held by these institutions, I do think it's important to at least try and see if we can figure out what they're finding so attractive about the company and whether you and I are missing anything. Because even with this hefty, nearly 40 times earnings multiple for a retailer that is at more mature stage of growth, many of these institutions are still holding on to their shares in Walmart.