A Bull Case for Walmart

In this podcast, Motley Fool senior analyst Jason Moser discusses:

• Key takeaways from Walmart's investor day event.
• Why the retailer is an underrated capital allocator.
• Investing observations from spring break.
• What he'll be watching this earnings season.

Additionally, Motley Fool senior analyst Asit Sharma talks with PubMatic CEO Rajeev Goel about how the sell-side advertising platform is faring in a tougher macroeconomic environment, as well as opportunities the company sees now.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on April 10, 2023.

Chris Hill: Just like that, we're gearing up for earnings season, Motley Fool Money starts now. I'm Chris Hill, joining me in studio, Motley Fool senior analyst Jason Moser. Happy Monday.

Jason Moser: It's always so nice to be in studio.

Chris Hill: It's nice to be in a studio.

Jason Moser: Yeah.

Chris Hill: We're going to get to earnings season in a little bit, but I want to start with something that happened last week, while you and I were both on our respective spring breaks, and that was the fact that Walmart held an investor day event in Florida. You don't have to be a Walmart shareholder to care about this event, because when it comes to the state of the U.S. consumer, you tell me, who has a better handle on that than Walmart? A number of things came out of it. One that leaped out to me was something we had talked about. I want to say six months ago, it was definitely in calendar year 2022 was how Walmart was starting to get higher-income customers coming in as the market was having a rough year last year, as the economy started to tighten up a little bit, interest rates rising, and one of the comments from the CFO at Walmart, was 75% of the market share gain, that they made in the food category, came from higher-income shoppers. I thought, my goodness, if they can hold onto some percentage of those folks, and keep them in the mix. They've already got the people who are looking for value.

Jason Moser: Yeah. I think they stand a good chance of probably keeping a number of those folks. Probably not all. Some people just revert back to their old behaviors, but what they had that is so key, you said it, it's grocery. That is, everybody needs it, we all need it, and it is the ultimate repeat purchase and Walmart has done a great job through the years of building out just this massive grocery presence. Now what I think is interesting with Walmart, what's been fun to watch over these last several years is we've watched Walmart really become more like Amazon. It's not a surprise in the sense that we saw all of the success that Amazon was having and realized Walmart needed to pivot, and start thinking a little bit more forward. It's really nice to see that not only did they do that, but they're executing on it as well. You can argue the degree of the comparison, but you can argue that they've made those moves. You're talking about new dynamics to this business. Things like data and analytics, advertising, streaming of membership model and Walmart Plus, it just goes on and on, and it's starting to pay off. When you look at the way the stock has performed over the last five years, it is sneaky good. It means shares' total returns up 91% over the last five years -- well outpacing the market. Just doing their own thing, when you go through this call, the presentation from last week, there were three key points that management laid out, that I think investors will want to focus on in the coming five years.

Those are in no particular order. They talk about growth and they believe that they now have built up this omnichannel presence that is comparable to its peers, becoming more Amazon-like, in being able to get things to people as quickly as possible. So we should continue to see that revenue growth based on the investments that they made into this business. Secondly, focused on margins, particularly operating margin, really looking to bring efficiencies all the way down to the bottom line. That's encouraging to see. Then ultimately, in returns, they're talking about making sure that they realize the returns on these investments, that shareholders realize these returns. Managing capital prudently, making the right investments, making sure to return value to shareholders in the form of dividends and share repurchases, which they've done a very good job to this point, that you add all that together, and while it has been sneaky over the last five years, it's performance. I think investors would be very wise to keep an eye on this one over the course of the next five years, because it looks like they have a very road map laid out.

Chris Hill: Walmart is one of those businesses that is easy to overlook when it comes to capital allocation because they don't really do the big acquisitions either in dollar amount, or just what it means to the underlying business. Did they buy Bonobos? They bought some fashion brand a few years back.

Jason Moser: Was it Bonobos? Maybe it was.

Chris Hill: I think. Honestly, the only one that comes to mind was, when they made the acquisition of Jet. I want to say that was 2014. Three billion dollars is the number I have in my head. Clearly, I haven't had enough coffee, but [laughs] they don't really make acquisitions in the way that other companies do. A lot of their investments, particularly what we saw early in the pandemic, and we saw it with Target, too, was ramping up their operations in terms of delivery, in terms of curbside pickup, in terms of their employee base safety, all that thing. That's really where they're investing their capital.

Jason Moser: Yeah and it's a business. It doesn't feel like they need to make those big acquisitions in order to succeed. Bonobos, I think was somewhere in the neighborhood of $300 million acquisitions and that's an apparel company. But the nice thing about Walmart is, they've already got the distribution in place. They can scale so quickly, and I think that's something we're going to see more and more here in the coming years, is really the benefits of all of these investments that they've made to grow that scale to a point now, where they have such a massive footprint. Again, focusing on that omnichannel experience, they're going to be able to meet the consumer wherever the consumer wants to be met. Again, going back to what these next several years will look like, the stage of this business now, it's now about realizing the returns of all of these investments.

That quote from that presentation, they said, we're now in a phase that is less about scaling store pickup and delivery, e-commerce assortment and e-commerce, square footage, of fulfillment center square footage, and more about execution, and operating margin improvements. They've got all the pieces in place, and now they seem very excited to realize the benefits of all of that hard work. That's why I feel, their five-year plan, they're calling for profitability to grow faster than sales. There's a big company, you don't expect revenue to continue growing at those 10[%], 20% annualized rates, but they will be able to realize, I think, a lot of efficiencies on the bottom line, and ultimately that's what the market is going to pay attention to. So for folks who think this is just a boring, staid business that is maybe past its prime, no pun intended. Maybe think again, I think these next few years could work out well for 'em.

Chris Hill: While you were chatting, I checked. I was off on the year, it was 2016, they made the acquisition for jet.com, but I was right on the amount. Last week, as I mentioned, spring break here in Northern Virginia. I was on a road trip with kid No. 3 looking at colleges in Philadelphia and Boston. I think you made the smarter decision, you just went to the beach. You just headed south, went to the beach.

Jason Moser: College conversations are ahead. It is not an unstressful time no matter where you are in our lives.

Chris Hill: That is true. But as we've said many times before, even when we're not working, there is no off switch for the investing brain. I'm curious, what if any business/investing observations did you have while you were down at the beach?

Jason Moser: Yeah. We drove down to North Carolina for the week and stayed at Topsail Beach, which was our first time there. We've done the Outer Banks several times before, but this is our first time at Topsail. What a lovely place, so we just really enjoyed it. Ultimately, what stood out to me, we stayed at an Airbnb. Airbnb is no new concept, but it made me think of last year we took our family to France for spring break, we stayed at an Airbnb, we Ubered everywhere and I came back just with this, oh my God, Uber is just in essential and I have a hard time seeing the world operate without Uber at this point. I came back this year with similar feelings regarding Airbnb. Hotels are great. They are perfect for certain occasions. I was in Oklahoma a couple of weeks previously and I stayed a hotel there, and that was great. It was a golf trip and I was just with some buddies. But this, we had our family, we had some friends with us. An Airbnb worked out so well and it always does. I know this is still a fairly young business.

They are still working out some kinks and I think the economics are working themselves out between guests and hosts and the business itself. But I think when you look at the benefits that Airbnb offers everyone from guests to hosts, there are immense benefits. You see all of these folks now that you're creating your own small business by virtue of just an Airbnb. Some hosts are better than others. I think this is a platform that really helps you filter through the bad to get to the good and that ultimately hopefully makes those folks who are not doing so well want to do better because they're getting that immediate feedback. But for me ultimately, it's a business that I wanted to dig into more and this trip really lit that fire, much like France last year lit that fire with Uber. I'm going to enjoy these next several weeks digging more into Airbnb because I really do feel like this is a business that has some serious staying power.

Chris Hill: Nice. I believe we were driving through Connecticut and drove by a truck, and it was the business Ocean State Job Lot. Now, this is a private business, but it's very much in the vein of Big Lots and Ollie's Bargain Outlet. It's a discount retailer started in Rhode Island. There's about 150 locations in the Mid-Atlantic and Northeast. What struck me was the tag line on the side of the Ocean State Job Lot truck. I hope whoever came up with this got some bonus because the tag line for Ocean State Job Lot could very well be the same for Big Lots or Ollie's and it's the home of adventure shopping. I thought who's not drawn in by that? Who doesn't want a little adventure when they go shopping? I just thought I hope whoever is working at Big Lots in the marketing department or Ollie's is having a meeting right now trying to figure out how do we tap into this? Because I genuinely think that is a compelling part of the pitch for a business like that. Any discount retailer it's like, hey, you never know what you're going to find. Obviously, Costco tries to do the same thing with their treasure hunt, but I think the value proposition of Costco outweighs that one. I think this is actually a pretty compelling key part of this type of discount retailer.

Jason Moser: It sparks the interest and that's really what that's meant to do. You want to get people in the door that one time and you feel like you've got a value proposition that'll bring them back in again and that typically works out pretty well.

Chris Hill: Earnings season starting at the end of the week. The big banks have been reporting. What is a company or an industry you're going to be watching particularly closely this earnings season and what are you going to be watching for?

Jason Moser: I'm always fascinated by the consumer. Here we talk all the time about tech and I think they're all merging together, I think ultimately. I think I'm less focused on the industry just because as generalists we cover so many different industries. But I think bigger picture, it is going to be worth noting how all of these businesses ultimately reviewing the consumer. We're starting to see signs that the job market may be starting to become a little bit more challenging. We're seeing that the pace of hiring is slowing a little bit. That's starting to make some sense. We're seeing access to credit becoming more difficult. The timeline for the consumer having that surplus of cash, so to speak. That timeline is shrinking. You start to see the consumer become a little bit more pinched. I think for me, watching a lot of these businesses, I think margins, in general, are going to be very important to pay attention to not only what's being reported today because we're going to be talking about ultimately the first quarter of the year. But ultimately what they're forecasting for the coming quarters, for the rest of the year, getting an idea of where they feel like the consumer stands today, what demand looks like, and ultimately that demand reflects in how companies can price.

Clearly, we've seen a consumer discretionary in just general retail, we're seeing pretty inflated inventory levels, seeing how they're handling that. I suspect we'll see some continued discounting across the board here throughout the rest of the year. But then also when you look a little bit further and like a lot of these companies just retail tech everywhere, their job cuts, that's been one of the big narratives here over the past six months. Starting to understand how the cost-cutting is going to play into these companies' bottom lines, you got to feel like revenue growth is going to probably be somewhat tepid. It's not going to be the greatest. For these companies to be able to paint a bit more of an optimistic picture, we need to see them bring these efficiencies down to the bottom line. A lot of cost-cutting, a lot of job cuts that we've seen over the past several months and so just getting out of an idea of how they see the rest of the year playing out with those two forces at play.

Chris Hill: Because we saw from a number of companies earlier this year, when they were particularly in their conference calls talking about the second half of 2023, there was a through line of optimism across industries. To your point, well here we are, it's the spring. We're closer to the second half of 2023. Does that change at all?

Jason Moser: Yeah. It's been a really fascinating start to the year. I remember last year toward the end of 2022 when I was saying in the end of the year investor letters from the two services I run, there's service on immersive technology, and service focused on 5G connectivity in the digital economy. But I said then it wouldn't surprise me if we got off to a little bit of a slower start to the year, and then maybe saw things pick up with some more optimistic outlooks. Fast forward to today and I just wrote a quarterly letter last week for both services. Both services far outperformed the market. The immersive tech service better than 20%, the connectivity service better than 22%. Well outpacing the Nasdaq, S&P, the Dow. It just goes to show you it's very difficult to predict in any a short timeline how these things will play out. But given the outperformance we saw in this first quarter, it really does beg the question what enthusiasm we're going to see in this current quarter and the rest of the year.

Chris Hill: Jason Moser, thanks so much for being here.

Jason Moser: Yeah. Thank you.

Chris Hill: This is one of those times in the stock market where it's good to be profitable, right now, especially if you're a tech company. PubMatic is a sell-side advertising platform. If you've ever played a free game on your phone, there's a good chance that PubMatic may have sold some of the ads that you saw. Motley Fool senior analyst Asit Sharma caught up with CEO Rajeev Goel to talk about how his company is faring in a tougher macro environment, and the opportunities for PubMatic in the near term.

Asit Sharma: Last time we spoke, the macroeconomic environment was humming along.

Rajeev Goel: Right.

Asit Sharma: Now we're in a different place today, can you tell me what is going on in the big environment -- play economist here? I'll ask you that in a second. But more importantly, what does this mean for your customers, and for PubMatic?

Rajeev Goel: Sure, well, I did study economics in my undergraduate, though I don't know that that makes me qualified as an economist though. But I think the key word here would be uncertainty, there's a high degree of uncertainty. I think the factors behind that are probably quite well understood by the audience, but interest rate uncertainty. You have the war in Ukraine, oil price inflation, all of that stuff. Then on top of that, in the month of March, so just a couple of weeks ago, we have a banking crisis, and I would say, a new driver of uncertainty, which is there going to be cut back on the lending side by banks, as a result of this banking crisis that would eventually play out with the consumer. I think that's the macro environment that we're in. As a result of that, what we saw in the second half of last year, second half of 2022, is that ad spend growth. The rate of growth came down significantly. Obviously, we were at, you could say, maybe an artificial high several years ago, driven by the pandemic when so many things moved online, I think consumer behavior continues to be very elevated online and that's probably a structural change. But the rate of ad spend growth has come down. The big question is, when does that turn back up? I think what gives us great confidence at PubMatic, is that, we have been profitable for a very long time. I think last year was our 10th consecutive year of profitability. That's just how we manage the business. We've been here, I've been here since the beginning, 16 years, so we've been through multiple banking crises and economic cycles and the like. For this year, what we've done is, we've built an investment plan, assuming a low-single-digit rate of growth in the market for 2023, this is for digital ad spend.

There's a wide range of forecasts from low single digits to high single digits, maybe double digits, and we are assuming the conservative side of it. There could be an upside if the market recovers faster than our assumption. But the things that we're really focused on is No. 1, even in this challenging environment, generating similar free cash flow in 2023 as we did in 2022, which is roughly 40 million. Positioning ourselves for revenue acceleration when ad spend stabilizes. We think, as we've seen in the past, ads spend always comes back. It's just a question of when, not if, when that happens we want to be in a position to accelerate growth. Then third, establish a new level of efficiency and our cost structure, by making our operations more efficient and driving for margin expansion in the future, then just to give you a sign of confidence, we announced a $75 million share repurchase in our last earnings call. Obviously, that indicates that the level of confidence that we have in our ability to execute through this.

Asit Sharma: Now, certain parts of your business are moving faster than others. If total digital advertising spend is decreased somewhat and hopefully will rebound this year, as we think of you as being on the sell side, that is, publishers who have content. You play a little bit on the other side as well. Can you talk a little bit about the parts of your business that you see maybe have a faster growth cadence this year. Because when you talk about your expectations for growth, you're really talking about a blended rate among different revenue generators on your platform?

Rajeev Goel: Yeah, absolutely. There's a couple of key growth drivers, and even I think despite the slowdown in industry growth rates, they're very much intact. The first is omnichannel video. We segment video into two different buckets. One is short form or online video, and then the other is long form or connected TV and streaming. These are collectively about a third of our business, and are continuing to grow at a very rapid rates. As an example, last year in 2022, our CTV business grew 3x over 2021, and in Q4, it grew 2x over the prior period, great growth. I think consumers obviously are consuming more and more video content online, and then advertisers are still catching up in terms of moving their ad budgets into CTV and it online video. Scaled part of our business, it's also margin expansion for us in that, it costs the same amount of money for us roughly to process a high CPM video ad impression, as it does a low CPM display ad impression. But the revenue that we generate through our usage-based business model, is significantly higher with the video ad impressions.

As the mix increases over time toward video, we see that as margin expansion. The secondary I'd call out is supply path optimization or SPO. This has been a long-term growth driver for us. Something we've been pioneering over the last four to five years, which is a process by which we engage with the major ad buyers. These are agencies and advertisers to facilitate their consolidating their ad budgets onto fewer sell-side platforms, and in particular onto PubMatic. We can rapidly grow the share that we have with major agencies and with advertisers. For instance, last year, we announced relationships with 28 ad buyers, including GroupM, Havas and Horizon Media, number of advertisers as well. I think a great metrics that we shared in the last quarter was that net spend retention for our SPO buyers that have worked with us for three or more years was 124%. Meaning we grew on average, each of those partners by 24% last year. Very sticky and high-growth part of our business.

Asit Sharma: I want to ask you about another theme in your business which you mentioned on your last earnings call, which has been a stealth, business opportunity in the industry, but it's getting a lot more press this year. This has to do with retail media advertising, I wanted you to explain for our listeners exactly what this is.

Rajeev Goel: Sure. Retail media and retail advertising really sits at the confluence of a couple of important industry trends. But what it is is very simply retailers or e-retailers. Online firms that you might shop with, or that are running transactions like Uber, for instance, they are getting into the advertising business and starting to sell inventory or sell ad space to advertisers. The reason they're doing this is, because they are sitting at the confluence of a couple of trends. No. 1 is that typically in a retail or transaction environment, a user is sharing their identity with the retailer. If you're a shopping online, or you're engaging in a DoorDash or an Uber transaction, they know exactly who you are, because you need to login for payment and for delivery of products and services. No. 2, because of the growth in internet consumption generally, a lot of these businesses have pretty significant audiences. If you think about an Uber or Walmart or somebody like that, Target, these are all people that are participating in retail media. They have very scaled not only brick-and-mortar but of course online properties are presence. Then third is that, advertisers are looking for high-quality environments in which to transact. In particular, in this kind of economic environment, they really want to be able to measure what's the return on ad spend.

In high-growth, frothy environments, they might reach for more brand advertising, but in a lower-growth and more pressured environment like we're in today, they're reaching for very performance oriented. If they're going to spend $10 million on advertising, they want to know that they've got a very clear return on that. In retail media, you can very clearly measure the outcomes. You can see that, OK, I showed this person an add, and did they actually click or did they transact, did they purchase, and what was the ROI on that? This is, I think, a really exciting opportunity. We see it as really a about $15 billion market opportunity. It's growing in the mid-20s percentage range. Amazon obviously is very deepened in this space. They have 30 to 50-billion-dollar advertising business at this point. Many other retailers are looking at that and saying, hey, I have the ingredients to be able to stand up a significantly scaled retail advertising business. Now they're looking for technology partners. We think we have a lot to offer in this space, given that we focus on high-performance advertising at scale, at being very efficient from a transaction perspective, at managing data, having global infrastructure, and being able to help retailers across mobile app, mobile web, desktop, connected TV environments. All of these are in play. Of course, we have deep relationships with agencies and advertisers through our focus on supply path optimization. We think all of that is a compelling opportunity for us to participate in retail media. We're very hard at work building technology and taking the various components of our technology stack and putting that together to create a very compelling retail video.

Chris Hill: As always, people on the program 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. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.