How Walmart Got It Right, and How Facebook Might

Walmart (WMT 1.32%) reported its fourth-quarter results Tuesday, and it seems the holidays were quite happy. Comp sales up were up by 4.2%, but the real news is how fast its e-commerce business is growing. And speaking of sales, Alphabet (GOOGL 0.55%) (GOOG 0.74%) and salesforce.com (CRM -0.18%) just spent $75 million for a stake in the U.K. fintech start-up GoCardless, making a revealing bet on our spending. Which is a natural segue into Facebook's (META -0.52%) latest bet -- that it can build a better artificial intelligence (AI) chip.

In this MarketFoolery podcast, host Mac Greer and senior analysts Ron Gross and Jason Moser discuss how Walmart recovered from the slump it was in just five years ago, why a couple of tech giants would want a piece of a tiny "war on cash" company, and the real reasons Facebook needs to supercharge its artificial intelligence game.

A full transcript follows the video.

Check out all our earnings call transcripts.

This video was recorded on Feb. 19, 2019.

Mac Greer: It's Tuesday, February 19th. Welcome to MarketFoolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Ron Gross and Jason Moser. Gentlemen, welcome! How are we doing?

Jason Moser: Hey!

Ron Gross: Hey, Mac! How are you?

Greer: I'm good! Guys, we're going to talk some war on cash -- Jason, one of your favorite topics. We're going to talk some Facebook and AI. AI, robots. Who doesn't love robots?

Gross: The people that are saying it's going to end the world.

Greer: OK, besides them --

Gross: Everybody else likes them!

Moser: Chris Hill seems to have a pretty rational fear of the rise of the machines, too.

Greer: That's true! Our future overlords. Let's begin with Walmart and some really impressive earnings here, Ron. Same-store sales in the U.S. up 4.2%. Groceries and toys, two of the big highlights. E-commerce sales up 43%. I had to really hit the "e" there because you don't really think of Walmart with e-commerce. The stock up around 3%. Some happy holidays for Walmart, huh? 

Gross: Yeah, really, really strong. This is 18 quarters of U.S. comparable-sales growth. If you recall, five years ago or so, let's say, all we talked about is how they needed to turn the U.S. business or this was going to be a company in trouble. Kudos to them for really getting that done. Eighteen quarters later, what a streak! As you said, the numbers are great. Comp sales up 4.2% is very strong. Strength in grocery sales. Online orders, as you mentioned, e-commerce up 43%. Holiday purchases, including toys, were quite strong. 

They did have a little bit of a benefit from the government shutdown. It caused the government to move up the distribution of food stamps. That actually had an impact. A small impact, but it did improve sales just a bit here. That won't happen again in the future. 

Traffic was up a little bit less than 1%. That's not amazing, but it's fine. What's better is that the average shopper's ticket was up 3.3%. Those two things combined to have some nice increase in sales. 

Greer: That all sounds good! Jason, what's not to like here? 

Moser: I mean, nothing, really. It depends on what you're looking for in an investment. If you go back five years and look at how Walmart has performed, on an absolute basis, it's returned you some money. On a comparison with the market, it's trailing the market. That's understandable. You throw Amazon in the mix there and then you can see very clearly the premium that the market's been willing to assign Amazon because of the move toward e-commerce. 

But I think when it comes to Walmart, you have to look a little bit beyond the e-commerce part of the market and understand that Amazon still has that little cloud business.

Greer: I've heard of that.

Moser: It's a big tailwind for them. That's where it really differentiates itself from Walmart. A doff of the cap at Walmart for competing. I really think they're doing a wonderful job of participating in competing in this space. But that's the one thing that Amazon has that Walmart doesn't, and I think that's why you would invest in Amazon over Walmart. You've got that cloud business, it's operating on about a $30 billion run rate.

Greer: Amazon Web Services.

Moser: Some of you may have heard of it. It's generating over 30% operating margins. That's where a lot of that profitability comes from. Whereas with Walmart, that's a retail play and it's operating on a much thinner margin. But, again, not taking anything away from Walmart. What Walmart has been doing has been very admirable, particularly when you look at how quickly e-commerce has reshaped the retail space.

Gross: If you're looking for weakness, you could probably point to international here for Walmart. Sales were actually down 2%. If you exclude currency, it looks a little better, up almost 3%. But they've been struggling there. They've sold off their stores in Brazil recently. They merged their U.K. operations with a rival. They spent $16 billion on Flipkart. Let's see how that goes. I think we're going to see some pressure, at least in the near term, on earnings as a result of that acquisition. But perhaps it will end up bearing fruit down the road. So, international could use some firming. If they get the U.S. and the international business firing on all cylinders, if you will --

Greer: I will!

Gross: -- if that happens at the same time, then you'll see the stock be a little bit less anemic. 

Greer: I want to tie those two points together. Jason was mentioning Amazon being assigned a multiple or premium in part because of Amazon Web Services and the cloud business. I think, as you look at Walmart's success, there's no question that there's going to be room for Walmart and Amazon in the near future. The question we have as investors is: Can these both be market-beating stocks? If Walmart has struggled to beat the market recently, is that going to change? Or, ultimately, does Amazon keep Walmart from being a market-beater?

Moser: I'd actually jump in here and say, perhaps the reason why Walmart has not beaten the market over the past five years is because they had to adapt quickly to a space that had changed seemingly overnight. They've made that adjustment, I think pretty well. One place where Walmart still does really well, especially when you compare it to Amazon, is in grocery. Amazon's trying to participate more in that space, obviously, with the Whole Foods acquisition. But I think Walmart still has a leg up when it comes to the grocery space, and I think they'll probably continue to have that because their offering resonates with most of the people out there in the country looking for value and convenience. With Amazon, sure, you're getting value and convenience, but Whole Foods, they're starting to push those prices back up, so they're separating themselves a little bit from the bigger market opportunity. 

I would actually venture a guess that Walmart can be a market-beating investment from today because they've adapted so well to the changing space. I think they've set themselves up for success. 

Gross: I think that's fair. Twenty-one times earnings, 2% dividend yield. I think it does have the potential to beat the market. Compare that to a Costco at 28 times, you're paying a premium for a company like Costco. Walmart, a little bit cheaper, and as a result, perhaps can be a market-beater.

Greer: OK, there you go. Bullish on Walmart, not quite as bullish on Costco? Is that fair?

Gross: Not at the current price, not quite.

Moser: [laughs] It always comes back to Costco.

Gross: It's a great company, and it will be a great company for the foreseeable future. The stock's not that cheap, though.

Greer: $1.50 hot dog and drink. Let's turn to the war on cash. Jason Moser, I know this is one of your favorite topics. Alphabet and Salesforce are investing $75 million in a U.K. online payments start-up, GoCardless. Jason, this investment will help GoCardless expand to the U.S. What's going on here? 

Moser: First and foremost, this is a drop in the bucket for Alphabet and Salesforce. This is just a rounding error for them. It makes a lot of sense for them to try to invest a little bit in the space to participate because clearly, we've seen this move toward a cashless society, not only on the consumer side but on the commercial side as well. That's what GoCardless does.

GoCardless is working in a specific niche. They're working with businesses and recurring payments. If you're a business with a recurring payment, perhaps it's a subscription or some type of bill that you're paying. They're working with those businesses to get more a part of that market. From the consumer side, for an analogy, let's just liken it to, you have your mortgage payment direct debited from your checking account every month. I'd love to be able to put my mortgage on my credit card every month because it'd be free points.

Gross: Yeah, that'd be great.

Moser: But, we can't do that. So, next logical thing is to have your bank go ahead and withdraw that money on behalf of the mortgage company. Essentially, GoCardless is working in that realm. And it's a very lucrative market. When you look at business-to-business opportunity, Mastercard was recently quoted on their call calling that opportunity, the dollars that flow through that business-to-business network on a global basis -- I'm going to give you a guess, Mac. How big do you think that number is? Wild guess.

Greer: It's in the billions. 

Moser: Technically.

Greer: It's in the multiple billions.

Moser: $125 trillion. 

Greer: Oh, my gosh!

Moser: Now, I'm talking about the money that flows through all of those networks. When you look domestically, you're looking at about a $25 trillion dollar network. That's why they're trying to play into that market. Even just capturing a small slice of it is meaningful for a company like GoCardless. So, working on those recurring payments as a direct debit vs. making a car payment, there are puts and takes for either way you do it. But, I think in a lot of cases with businesses that are looking to have a recurring, predictable payment taken out from their account, this is just an easy way to do it.

Greer: OK, guys, for our final story, we're going to talk some AI. We're going to talk some Facebook. Is Facebook coming after Siri and Alexa? Well, maybe, Jason. Facebook announced a partnership with Intel last month. And now, according to the Financial Times, Facebook is hoping its AI chips will power a virtual assistant that's smarter than Apple's Siri and Amazon's Alexa. Jason, what do you think when you hear Facebook and AI and coming after Alexa and Siri?

Moser: I kind of want to run for the hills.

Gross: [laughs] It's a little scary, maybe?

Moser: I think that's the sexy headline, talking about that AI that's going to be smarter than anything on the face of the Earth. And I don't blame them for trying to put that across. I think this, in the near term at least, is a bet on Facebook's part in trying to find a way to moderate the content on their platforms in a better way. Right now, what we're finding is that moderation is not very scalable. A lot of things keep slipping through the cracks. So, they're working with Intel, for example, to develop this AI chip that would ultimately help them do that, help them moderate the content on their platforms, which then creates a more engaging platform, which then brings more advertising customers in, and that's Facebook's bread and butter, advertising revenue. From that perspective, it makes total sense. That's what they need to be focused on right now. It could be argued that they're in a bit of a bind. 

If you look out to India, I think India is a good example here with WhatsApp. I was just recently reading about how the government in India is really cracking down on the content that is making its way onto these platforms. If they have their way there, that's one of WhatsApp's biggest markets, it would really stifle communication on that platform, which would really stifle any potential monetization opportunities Facebook has with WhatsApp. And I think we're all still questioning whether that was really a fair price that they paid back when they acquired WhatsApp, something like $20 billion. They haven't really produced any kind of meaningful monetization from it yet. 

Really, this is all about Facebook trying to figure out how to make its platform more engaging and to be able to filter that bad content out. Now, down the road, sure, they can come up with an assistant that's smarter than Siri or Alexa. Do I think they will? No, I don't. I think they say a lot of things and they fail at a lot of things, too. There's this Portal thing, which I don't know is really gaining any traction whatsoever. There was an assistant recently in Messenger, I think it was coined M? They shut that down. You have to explain to me why this assistant matters. Tell me what I'm going to be doing with it. Right now, I think we're seeing a lot of the novelty wear off with a lot of these assistants, as it stands. 

Gross: I don't have much to add there, except for those who are dying for some insight into the Gross household over the weekend. 

Greer: I am!

Gross: It should be known that just Sunday, I believe it was, I asked Alexa what she thought of Siri because I was bored. And she answered me. She said something to the effect of, "I am fond of all AIs."

Greer: That's nice!

Moser: That's very diplomatic!

Gross: It was very diplomatic! So, if you want to have some fun on the weekends, pop over to my home. 

Greer: My only experience -- we don't have Alexa or any of these contraptions in our household -- was at a Cub Scout meeting and I was trying to get the kids to focus -- this was a couple of years ago -- and there was an Alexa in the kitchen and they were getting it to make fart noises. Something like that.

Gross: [laughs] That is so not funny!

Greer: And I can't compete with that! They were like 9- and 10-year-old boys. And you know what? This is almost a reason to buy Alexa.

Moser: I remember when we introduced that into our household and I told the kids to try it. And so we got it when their mom was in the other room and used the remote and asked Alexa for a fart and all of the sudden in the other room you hear this and you know...my wife looks up and says "What in the world was that?!" The kids had a lot of fun with that.

Greer: So I wonder if Facebook can compete with that. What do you think?

Moser: I mean hey, it sounds like there's a lot of hot air going on their platform.

Greer: [laughs] Thank you! Thank you! It's a free show, people!

Moser: One more thing. Put this in the context with Amazon, because Amazon is working on the same type of thing, like Amazon building their own chips, just like Facebook partnering with Intel. But it's a matter of what they're doing with those chips. Amazon is building that technology to basically let their cloud customers use. If you're a cloud customer and you're using Amazon technology and it's more intuitive and it's helping your business, that's probably going to keep you in that network for a little bit longer. And that's a good thing, ultimately, for Amazon. But it falls in line with that Jeff Bezos philosophy we've come to know and love in that he wants to make money from you and those enterprises out there using Amazon devices and technology, not from buying the technology.

Greer: The blades, not the razor. There you go! Well, the desert island question, guys. Once again, the caveat, do not invest this way at home. It's just a fun throwaway question in the show. If you're on a desert island for the next five years and you can own only one of these stocks, what are you going with? Walmart, Google/Alphabet, or Facebook? 

Gross: Hmm. Jason?

Moser: Speaking as an Alphabet shareholder and not owning either of the other two, I'm going to stick with my guns and go with Alphabet. I just think there's too much opportunity there with what they're doing today.

Greer: I should mention Salesforce, too. I'll throw in Salesforce.

Moser: Eh, maybe not. If you give me Salesforce for free...I just think search is forever, and the other properties they have with Waze and YouTube and Maps, a lot of different ways to monetize some very valuable properties there. 

Gross: I'm going to have to agree, I think. I think Google's the way to go out of those four.

Greer: OK, very interesting! Ron, Jason, thanks for joining me! As always, people on the show may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of MarketFoolery! This show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We'll see you tomorrow!