Walmart’s $2 billion acquisition of Vizio has thrust a new revenue avenue into the spotlight, drawing heightened attention from investors eager to see how it might bolster retailers’ bottom lines.
The deal, unveiled by Walmart late last month, might seem straightforward at first glance: a retail giant snapping up a producer of goods it already sells. However, the transaction is a strategic move by Walmart to expand its advertising footprint beyond the confines of its stores and website.
This announcement arrives amidst a pivotal moment in the advertising landscape, with retail media poised to claim over 20% of digital ad spending this year, a significant uptick from the roughly 15% share it held five years prior, according to Insider Intelligence.
Jefferies analyst Corey Tarlowe emphasized the nuanced nature of the deal, stating, “To the everyday consumer, this just seems like a retailer buying a supplier of a category that they sell. But it’s not that way.”
Tarlowe outlined three primary avenues through which retailers such as Walmart stand to gain from advertising. First, there are promotions for in-store products. Then, there’s ad space on the retailer’s website or sponsored listings. Lastly, there’s the burgeoning realm of connected TV and other digital advertising platforms, extending beyond the confines of the company’s website. For instance, retailers can now display ads on TVs through operating platforms they own.
Utilizing the wealth of consumer data amassed from in-store and online purchases, retailers can tailor their ad offerings to specific demographics, making them more attractive to companies seeking to target their products effectively.
While off-site advertising poses unique challenges compared to on-site placements, such as those on Walmart.com or in physical stores, Morgan Stanley analyst Matt Cost highlighted its immense revenue potential for retailers, given the expanded advertising of real estate now available to them.
Cost also pointed out the increasing importance of privacy in shaping advertising trends. In this landscape, successful retailers can command a premium for their ability to leverage their extensive customer data, especially as data collection becomes more challenging for others.
Morgan Stanley analyst Simeon Gutman contextualized this shift within the broader evolution of retail advertising. With retail margins under pressure due to the online shift, retailers must explore alternative avenues to drive profitability. Advertising emerges as a natural successor, leveraging the online shift to their advantage and tapping into new digital territories beyond their traditional domains.
Walmart stands at the forefront of the retail landscape, seizing a leadership position with its recent deal, according to Gutman. This leadership role is a natural fit for the Arkansas-based behemoth, given its sheer size and expansive reach.
Gutman noted that Walmart is virtually the only retailer making substantial strides in this form of advertising. The growth of Walmart Connect’s ad sales by 28% in 2023 to $3.4 billion underscores its significance. Although this revenue represents less than 1% of Walmart’s total revenue, the profit margins are notably lucrative. While other players like Ulta and Albertsons are venturing into the space, their impact on financials remains relatively minimal.
Before the acquisition, Walmart’s Onn private label TVs relied on an external operating system. Consequently, the company had to redirect advertisers interested in connected opportunities to the platform owner, as explained by Jefferies’ Tarlowe. However, with the integration of Vizio’s SmartCast software, Walmart gains the capability to internally manage ad space on the platform, particularly once its agreement with competitor Roku expires.
Gutman expressed confidence in this strategic move, emphasizing its logical foundation and market endorsement, contrasting it with Walmart’s past experimental initiatives.
Connected TV represents just one facet of a broader shift that’s buoying optimism around Walmart’s stock, analysts informed CNBC Pro. While these developments may not individually alter investment theses, they complement a narrative of substantial importance, Gutman stressed.
Furthermore, the deal signifies Walmart’s advancement in its quest for alternative profit streams characterized by faster growth and higher margins than traditional retail, according to Gutman.
Meanwhile, Tarlowe highlighted Walmart’s allure as an investment due to its continuous market share expansion, bolstered by its burgeoning e-commerce and online grocery segments.
He cited Walmart+ as another promising revenue stream with higher margins, alongside the company’s efforts to streamline operations through technology like artificial intelligence. Despite the acquisition costs associated with Vizio, Walmart is anticipated to surpass Wall Street expectations and revise its forecasts upward with each earnings report this year.
Walmart’s performance in 2024 has surpassed that of the broader S&P 500 and SPDR S&P Retail ETF (XRT), registering a gain of over 12%. This marks a reversal from 2023 when the stock lagged, rising just over 11%.
Wall Street anticipates further upside, with analysts polled by FactSet projecting an average price target signaling more than 10% potential growth. Approximately 85% of analysts maintain buy ratings on the stock, according to FactSet data.
Looking beyond Walmart, analysts underscore the importance of size and scale for retailers to thrive in off-site advertising. Essentially, investors should seek out retailers with a substantial consumer base capable of attracting advertisers.
According to Tarlowe, Costco and Target possess the requisite size and data infrastructure to venture into off-site advertising successfully, particularly given their focus on a higher-end consumer demographic. However, their performance this year has diverged, with Costco outperforming the market by around 15%, while Target has seen more modest gains below 7%.
Despite Target’s comparatively weaker performance, analysts polled by FactSet anticipate a potential rise of over 5% in Target shares over the next 12 months, while projecting a pullback of more than 6% for Costco.
Elsewhere, Tarlowe identified Dollar General as a niche retailer poised to capitalize on the retail advertising landscape. After a steep decline of over 44% in 2023, Dollar General has rebounded by more than 8% this year. However, analysts forecast this rebound to be short-lived, with the majority maintaining hold ratings and expecting shares to slip by almost 6%, according to FactSet.
On the advertiser side, Cost highlighted two public companies, Criteo and Trade Desk, that provide essential technology for retailers venturing into off-site advertising. These companies serve as intermediaries for retailers lacking the requisite technology infrastructure. Despite Criteo’s ADR soaring by more than 30% in 2024, the stock still trades below its 2021 levels, indicative of the significant sell-off witnessed in 2022 and 2023. Over half of analysts maintain buy ratings on Criteo, with an average price target indicating a potential upside of 9%.
Meanwhile, Trade Desk has seen a gain of over 15% this year, yet shares remain cheaper than their 2021 levels. With more than three-quarters of analysts surveyed by FactSet holding buy ratings on Trade Desk, the average analyst expects a rally of over 20% over the next year.
