The world's biggest brick-and-mortar retailer is evolving in a big way. Yes, Walmart (WMT +0.00%) is doing more online sales every year, but that's not its biggest evolution taking shape right now. Neither is its foray into primary healthcare, or any of its other traffic-driving offerings like premium private-label wines or technology-installation services.
Rather, the company's most game-changing initiative currently underway is the advent of its digital advertising business -- called Walmart Connect -- driven by online-shopping traffic at Walmart.com. Walmart only saw $2.7 billion worth of this ad business last fiscal year (ended in January) versus company-wide revenue of $611 billion. But that advertising revenue figure grew nearly 30% last year, and was up 41% year over year just last quarter.
Walmart sees the light on digital ads
The kicker? CFO John David Rainey says this budding business is just getting started, and will make up a significant part of the company's profit profile in the very near future. He explained at the recent Raymond James-hosted investor conference:
Today, the vast majority of our overall profits are attributable to in-store brick-and-mortar in the U.S. If you fast forward five years, we are much less dependent on that as an income stream than some of these other faster-growing parts of our business.
What that may mean in terms of raw numbers isn't clear. For perspective, however, Walmart earned $11.7 billion last year, down just a bit from the previous year's bottom line of $13.7 billion. Even at the 70% to 80% margins its digital advertising business boasts, last year's $2.7 billion in digital ad revenue isn't exactly game-changing to the bottom line.
NASDAQ: WMT
Key Data Points
Again, though, this monetization of Walmart.com is in its infancy. It only became the Walmart Connect advertisers know and understand today in early 2021, relaunching in the midst of a pandemic that in some ways continues to linger. Advertisers are still trying to figure out how to best use the promotional option as well. Meanwhile, Walmart itself is still optimizing its e-commerce platform. Lots of factors are in flux.
Nevertheless, there's good reason for current and prospective Walmart shareholders to be excited about the profit-growth prospects that Rainey made a point of pointing out.
And the tide is clearly rising
Chief among the reasons to expect meaningful company-wide profit growth driven by Walmart Connect is the fact that it's a proven business model.
Thank Amazon for this proof, mostly. The e-commerce giant leveraged the reach of Amazon.com to do $11.6 billion worth of advertising business last quarter, up 19% year over year. For all of 2022, Amazon generated nearly $38 billion worth of digital advertising revenue, up more than 20% compared to 2021's tally.
Research outfit eMarketer estimates the U.S. market for this type of retail-media advertising will grow from last year's $40.8 billion to $51.4 billion this year to $61.1 billion next year. The point is, there's money to be made doing this once-unusual form of third-party promotion.
Another key reason to cheer Walmart's nascent ad venture: Walmart.com's reach continues to grow at a brisk pace. Last year's e-commerce revenue was 12% better than the prior year's, and up 23% from online sales achieved two years back when the COVID-19 pandemic was catapulting its online business higher.
And yet, there's still room for considerably more growth. Only around 13% -- or roughly $80 billion per year -- of Walmart's total annual revenue is currently done via Walmart.com. The more that its business moves online, the more it makes sense for the site's third-party sellers to pay Walmart to feature their goods. In Rainey's words, "The more eyeballs that are coming to your digital platforms, the more advertisers want to spend money."
In this vein, know that the retailer's online marketplace now offers more than 400 million unique products sold by well over 100,000 sellers. And they're not going anywhere. A recent survey by the market researchers at Jungle Scout indicates that 95% of Walmart Marketplace sellers are running profitable online businesses. That's the key ingredient needed for the platform's expansion and the subsequent growth of its advertising business.
We know enough to be bullish
What's still missing from the mix are specific projections, but that's understandable. This is a relatively young sliver of the web advertising industry, and Walmart itself is still learning the ropes. We know enough to know, however, that this is a compelling growth opportunity.
The brick-and-mortar retailer has only gotten its feet wet in this business. There's so much more it can do to grow visits to Walmart.com and then monetize that traffic. If it only does half as well as Amazon is doing on this front, Walmart's digital ad business will still be generating more than twice the $2.7 billion worth of annual revenue it's generating now.
And remember, the bulk of that revenue will be converted into operating profits. Given how little the company makes by selling merchandise (net operating margins on the order of 4% and net income margins nearer 2%), it's not inconceivable that digital advertising could eventually be driving a third or more of Walmart's current net profits. Better yet, it should be able to do so without cannibalizing the bulk of its other business.
That's a mighty compelling bullish argument.
