Walmart: Streaming Is A Smart Move
Summary
- Walmart is reportedly considering investing in a streaming service.
- Content is very valuable, especially the development of blockbuster IP.
- Investing cash flow in streaming is a good way of expanding the company's mature revenue base.
- Walmart could build up a studio that might eventually be strategically sold or structured as a spinoff. The company could acquire a studio as well.
- Filmed-entertainment content offers many cross-promotional opportunities in the brick and mortar footprint.
Walmart (NYSE:WMT) reportedly wants in on the streaming game. This is exactly what Walmart - the owner of digital-movie site Vudu, it should be noted - should be doing to compete in the new era of online, mall-destroying competition. The only problem is the company should have made this move a long time ago.
There are several reasons why the company would benefit from a streaming service.
First, Walmart is a large, mature company with significant cash flows. It is looked upon as a total-return stock. When a business gets to this point, it becomes difficult to find new revenue streams; it also becomes difficult to adjust to various competitive landscapes that are driven by technological startups. Acquisitions are needed, but they don't always do the trick. According to the annual report (.pdf file), in fiscal 2018 the company captured $500 billion in sales. Over $11 billion of that top-line activity was courtesy of electronic commerce. $28 billion made its way to operating cash flow. Management used $14 billion for buybacks and quarterly payments to shareholders. Capital investment was $10 billion.
I see opportunity in these numbers. To compete in the streaming industry, any viable player in the game must spend a lot of money on content, whether it be licensing or creating originals. In Walmart's case, I am going to assume it will be doing both. Billions will need to be invested. The specific opportunity I see is reducing the amount returned to shareholders and allocating it toward content investment.
This might seem inadvisable for a company in the Dow Jones Industrial Average, but in my opinion, it would not be. Most companies in the index are expected to be consistent cash-flow leaders that commit to an increasing-dividend strategy backed by safe, conservative growth initiatives. Taking big risks is not necessarily in the index's DNA, but Walmart seems like it wants to act like a startup, in a sense. The fact that it is even thinking about a streaming service should make Wall Street take notice, in addition to its big push into electronic commerce.
To be totally clear, a streaming service would indeed be a risk if it resulted in a purposeful reduction in dividends, or a dividend payment that was held steady for several years, or a reduction in buybacks. Dividends/buybacks are popular activities for shareholders. The risk, however, is worth it because the potential reward is so great. There is such a demand for content, and Walmart knows a lot about the industry by virtue of the fact that it is a major seller of physical entertainment media. It has data to analyze, in other words.
Let's move on to the next reason: incredible opportunities for synergy between the streaming service and the stores. Walmart has a chance to sell a streaming-service subscription to every customer passing through a point-of-sale. It can bundle an offer with any of the numerous products it sells. It can offer the service free for a few months with certain purchases. It can set up a streaming-service kiosk in the center of the company's electronic departments. The retailer has a large footprint, and it can leverage it to drive membership. Obviously a company/competitor like Disney (DIS) can do this as well. I fully expect the Mouse to promote its upcoming offering in its retail stores, resorts and parks. Walmart may not own resorts/parks of its own, but its points-of-sale are very powerful in their own right.
Walmart could add value to the whole moviemaking process. One of the toughest things to do in Hollywood is keep costs down. Producers/writers/actors all want large paydays, and below-the-line costs are also expensive. I would fully expect Walmart to at least aggressively attempt to reign in costs as its wont with suppliers. The company has never been a fan of paying more than is necessary to its vendors; it demands all efficiencies to be identified and exploited. I specifically chose the phrase aggressively attempt because Hollywood is notorious for using other people's money to generate perennial cash flows for itself at the expense of a return for investors (here I am obviously referring to talent/agents/etc.). I'm not naïve enough to think that Walmart can get around agents, but I do think management will be very conservative as it concerns production costs...that can only be a good thing for shareholders.
Creating IP is one of the best things a company in the tech/retail industry can do. Technological advances have lowered the threshold of entering the content game. Anyone with a phone can upload a video on a platform and start a channel. Why shouldn't this include Walmart? Of course, at that scale, you are talking a subscription streaming service and not a string of unboxing videos. Nevertheless, the concept is the same, and Walmart would benefit from creating studio assets backed by IP libraries that could be useful later on after they appreciate over time. The company could find itself in a position to sell appreciated content assets, or even float them as spinoffs, or even possibly enter into the tracking-stock game to unlock value. There are several possibilities, and I believe if Walmart can create franchises it distributes to all windows - theatrical, broadcast, cable, streaming - and promote them on a global scale, then its stock will react as its stores sell exclusive merchandise and otherwise benefit. Put another way: why can't Walmart make its own portfolio of Pixar-like characters?
As with any new venture, there are risks. I've mentioned the problem of spending too much on content. In addition to that, there is the risk the company simply won't figure out the game of content creation and ends up producing low-quality knockoffs of everything else that is out there. I find the latter pretty low-risk given that there are plenty of executives from Hollywood that could be hired to bring the company to the streaming marketplace. Acquihires also are a possibility: management may decide that buying a studio is the easiest way to ramp up in the content game. Walmart's market cap (as of this writing) is over $260 billion. I mentioned earlier that it returned $14 billion to shareholders in 2018. Lions Gate Entertainment (LGF.A) (LGF.B) has a market cap of $3.4 billion. It makes one think.
Let's check out Walmart's recent price action:
The stock isn't in an exciting position right now, but it seems to be base-building. The dividend yield, at 2.3%, is decent, although getting a higher rate would be preferable.
Walmart is at an exciting moment in its corporate life. Once it truly gets in the filmed-entertainment game, I believe investors will take notice. I am keeping this one on a watch list, both in terms of price and news flow.
This article was written by
Analyst’s Disclosure: I am/we are long DIS, LGF.A. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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