Walmart (WMT -0.08%) isn't what most investors consider a growth stock.
The retail kingpin has been around for 60 years and is a mainstay in the U.S. economy and the recipient of close to 10% of all non-automotive retail spending in the U.S. Walmart essentially stopped opening new stores several years ago.
What growth it does see comes from its pivot in the past decade to an omnichannel approach, building out online grocery pickup stations at most of its stores, investing in delivery and fulfillment capabilities, and spending on store remodels to make the in-store experience more appealing and to improve the ability of stores to fulfill online orders. Those efforts are bearing fruit as Walmart just delivered a strong fourth-quarter earnings report, beating revenue and earnings estimates in a tough macroeconomic environment.
However, the company's investments in new categories did reveal one surprising area that could significantly move the growth needle for Walmart: advertising. Walmart took its ad business in-house a few years ago, and as its e-commerce channel has grown, so has advertising.
Image source: Walmart.
A new revenue stream
In the Q4 earnings report, management said that its global advertising business grew more than 20% year over year, led by 41% growth from Walmart Connect in the U.S. For the full year, advertising revenue rose 30% to reach $2.7 billion, led by Walmart Connect in the U.S. and Flipkart Ads in India.
An amount like $2.7 billion may not sound like a lot for a company that just posted $611 billion in revenue for the year, but the ad business has the ability to punch above its weight, especially given the growth numbers.
Walmart just reported 41% ad growth in the U.S. during a quarter when digital ad giants like Meta Platforms and Alphabet both reported declining ad revenue, showing that Walmart is an attractive digital ad partner, as 90% of American households shop at the retailer.
The company's annual e-commerce sales also reached $80 billion, making it one of the biggest online retailers in the world, and since so many big brands count on Walmart as their biggest customer (or one of their biggest), it's naturally an attractive advertising partner for the likes of big consumer packaged goods (CPG) companies and other brands that sell to it. Management called out advertising as one of the factors that led to 17% growth in e-commerce at Walmart U.S. in the quarter, and the company also said on the earnings call that it now has 400 million SKUs on its marketplace, making its ad platform attractive to long-tail marketplace sellers as well, or those who sell harder-to-find items.
Following in Amazon's footsteps
Walmart doesn't have to look hard to see how powerful its advertising business can be. Amazon (AMZN 3.43%) scaled its ad business over the last decade to nearly $40 billion in revenue in 2022, and though the company doesn't break out advertising profits, it's highly likely that that is high-margin revenue.
Meta and Alphabet, the owners of Facebook and Google, have historically reported advertising profit margins in the 30% or even 40% range, and online retailers like Amazon and now Walmart have the advantage of being at the bottom of the marketing funnel where consumers have already decided they want to make a purchase. Their websites are high-value ads, in other words, and that explains why Amazon and Walmart have continued to deliver strong advertising growth even as ad revenue flatlined at Meta and Alphabet.
Walmart's advertising business may be small, especially relative to its size, but if the retailer can continue to grow its ad business at 30% a year -- a reasonable percentage considering Amazon's track record -- it would reach $10 billion in revenue in just five years. At a 30% operating margin, that would give the company a new profit stream worth $3 billion and still growing, which is meaningful even for Walmart as the company just posted $20.4 billion in operating income for fiscal 2023.
While it will take some time to develop, the ad business could be a huge win for Walmart and is one of a number of emerging growth businesses at the company. Though the company may have a reputation as a stodgy retail stock, it's changed significantly in the last decade, and that's one reason investors should give it a closer look after a strong Q4 report.
