Motley Fool Hidden Gems Investing - A Bull Case for Walmart

Episode Date: April 10, 2023

Earnings season kicks off on Friday. What should investors be watching? (00:21) 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 (16:47) Asit Sharma talks with PubMatic CEO Rajeev Goel about how the sell-side advertising platform is faring in a tougher macro-economic environment, as well as opportunities now. Companies discussed: WMT, AMZN, ABNB, BIG, OLLI, PUBM, UBER Host: Chris Hill Guests: Jason Moser, Asit Sharma, Rajeev Goel Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. And 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. It's always so nice to be in studio. Nice to be in the studio. 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. And 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 leapt 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. And I thought, my goodness, if they can hold on to some percentage of those folks and keep them in the mix, they've already

got people who are looking for value. Yeah. And I think they stand a good chance of probably keeping a number of those folks. I mean, probably not all. I mean, some people just revert back to their old behaviors. But I mean, what they have that is so key, you said it, it's grocery, right? I mean, 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. I mean, 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. I mean, you can argue the degree of the comparison, but you can't argue that they've made those moves. I mean, you're talking about new dynamics to this business, things like data and analytics, advertising, streaming, a membership model on Walmart+. It just goes on and on. 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. 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. And those are in no particular order. They talk about growth, and they believe that they now have built up this omni-channel 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. And then, ultimately, in returns, they're talking about making sure that

they realize the returns on these investments, that shareholders realize these returns. So, 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. You add all of that together, and while it has been sneaky over the last five years, its 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 good roadmap laid out.

And 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. Was it Bonobos? Maybe it was. I think. Honestly, the only one that comes to mind was when they made the acquisition of Jet. And I want to say that was 2014. $3 billion is the number I have in my head. Clearly, I haven't had enough coffee. But they don't really make acquisitions in the way that other companies do. And 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-based safety, all that sort of thing. I mean, that's really where they're investing their capital. Yeah. And it's a business that doesn't feel like they need to make those big acquisitions in order to succeed, right? I mean, Bonobos, I think, was somewhere in the neighborhood of $300 million acquisition. That's an apparel company. But the nice thing about Walmart is they've already got the distribution in place, right? 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. And again, focusing on that omni-channel experience, they're going to be able to meet the consumer wherever the consumer wants to be met. And again, going back to sort of what these next several years will look like, I mean, the stage of this business now, it's now about realizing the returns of all of these investments. A 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, fulfillment center square footage, more about execution and operating margin of improvement. So, 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, I mean, their five-year plan, they're calling for profitability to grow faster than sales, right? This is 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's 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 them. All right. Well, you were chatting on check. I was off on the air. It was 2016 they made

the acquisition of Jet.com, but I was right on the amount. So, 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. Well, college conversations were had. It is not an unstressful time, no matter where you are in our lives. 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. So, I'm curious, what, if any, business-slash-investing observations did you have while you were down at the beach?

Yeah, we drove down to North Carolina for the week and stayed at Top Sail Beach, which was our first time there. We'd done the Outer Banks several times before, but this was our first time at Top Sail. What a lovely place. We just really enjoyed it. And ultimately, what stood out to me, you know, we stayed in an Airbnb. And 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 inessential. And I have a hard time seeing the world operate without Uber at this point. and 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 stayed at 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, and Airbnb worked out so well. And it always does. And I know this is still a fairly young business. They are still working out some kinks. And I think the

economics are kind of working themselves out between guests and hosts in 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. And some hosts are better than others. And 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, you know, it's a business that I've wanted to dig into more. And this trip really kind of lit that fire, much like France last year lit

that fire with Uber. So 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. Nice. When we were on the road, I believe we were driving through Connecticut and drove by a truck. 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. I mean, it's a discount retailer started in Rhode Island. There's about 150 locations in the Mid-Atlantic and Northeast. And what struck me was the tagline on the side of the Ocean State Job Lot truck.

I thought, I hope whoever came up with this got some kind of bonus, because the tagline 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. And I thought, who's not drawn in by that? Who doesn't want a little adventure when they go shopping? And 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 like, wait, how do we tap into this? Because I genuinely think that is a compelling part of the pitch for a business like that. Any kind of discount retailer, it's like, hey, you never know what you're going to find. Obviously, Costco tries to do the same sort

of thing with their treasure hunt. But I think the value proposition of Costco outweighs that, where I think this is actually a pretty compelling key part of this type of discount retailer. 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, then, yeah, that typically works out pretty well. All right. Earnings season starting at the end of the week. The big banks will be 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?

I guess as far as industry, I'm always fascinated by the consumer, right? I mean, We talk all the time about tech, and I think they're all sort of merging together, I think, ultimately. So, I think I'm less focused on the industry just because, as generalists, we cover so many different industries. But I think bigger picture, I mean, it is going to be, I think, worth noting how all of these businesses ultimately are viewing the consumer, right? We're starting to see signs that the job market may be starting to become a little bit more challenging. We're seeing the pace of hiring 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, very, very important to pay attention to. Not only what's being reported today, right, 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, right, 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 in consumer discretionary and just general retail, we're seeing pretty inflated inventory levels. So, kind of seeing how they're handling that.

I would 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, like a lot of these companies, just retail tech everywhere. I mean, they're job cuts. That's been one of the big narratives here of the past six months. Starting to understand how the cost-cutting is going to play into these companies' bottom lines. You've got to feel like revenue growth is going to probably be somewhat tepid. It's not going to be, I think, 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. So, just getting an idea of how they see the rest of the year playing out with those two forces at play. 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. And so, 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? Yeah. I mean, it's been a really fascinating start to the year. I mean, I remember last year towards the end of 2022, and I was saying in the end of the year, investor letters for the two services I run, the service on immersive technology and a 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 kind of 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, right? The immersive tech service better than 20 percent, the connectivity service better than 22 percent, well outpacing the NASDAQ, S&P, the Dow. So, it just goes to show you, it's very difficult to predict in any kind of a short sort of timeline how these things will play out. But given the outperformance we saw in this first quarter, yeah, I mean, it really does beg the question, what kind of enthusiasm are we going

to see in this current quarter and the rest of the year? Jason Moser, thanks so much for being here. Yeah, thank you. 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 Rajiv Gold to talk about how his company is faring in a tougher macro environment and the opportunities for Pubmatic in the near term. So, last time we spoke, the macroeconomic

environment was humming along. And 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 for a second. But more importantly, what does this mean for your customers and for Pubmatic? Sure. Well, I did study economics in my undergraduate, so I don't know that that makes me qualified as an economist, though. But I think the key word here would be uncertainty, right? So 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, you know, oil prices, inflation, right, all of that stuff. And then on top of that,

in the month of March, so just a couple of weeks ago, we have banking crisis. And I would say a new driver of uncertainty, which is, is there going to be, you know, cutback on the lending side by banks as a result of this banking crisis that, you know, would eventually play out with the consumer. So, I think that's kind of the macro environment that we're in. And 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, you know, came down significantly. And obviously, we were at, you could say, maybe an artificial high several years ago, driven by the pandemic when, you know, 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. And so, the big question is, you know, when does that turn back up? And I think what gives us great confidence at Pubmatic is that, you know, we have been profitable for a very long time. You know, I think last year was our 10th consecutive year of profitability. And so, that's just how we manage the business. You know, 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. And so, 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. And there's a wide range of forecasts from, you

know, low single digits to high single digits, maybe double digits. But we are assuming the conservative side of it. And so there could be upside if the market recovers faster than our assumption. But the things that we are really focused on is, number one, 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. So we think, you know, as we've seen in the past, ad spend always comes back. It's just a question of when, not if. And so when that happens, we want to be in a position to accelerate growth. And then third, you know, establish a new level of efficiency in our cost structure by, you know, making our

operations more efficient and driving for margin expansion in the future. And just to give you a sign of kind of confidence, we announced a $75 million share repurchase in our last earnings calls. Obviously, that indicates the level of confidence that we have in our ability to execute through this. Now, certain parts of your business are moving faster than others. If total digital advertising spend is decreased somewhat, and hopefully we'll 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? When you talk about your expectations for

growth, you're really talking about a blended rate among different revenue generators on your platform. Yeah, absolutely. There's a couple of key growth drivers. Despite the slowdown in industry growth rates, they're very much intact. The first is omni-channel 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. And so, these are collectively about a third of our business and are continuing to grow at 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. So, you know, great, great growth.

And, you know, 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, you know, into CTV and into online video. So 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. So as the mix increases over time towards video,

we see that as margin expansion. The second area I'd call out is supply path optimization or SPO. And 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. So these are agencies and advertisers to facilitate their consolidating their ad budgets onto fewer sell-side platforms, and in particular onto Pubmatic, so we can rapidly grow the share that we have with major agencies and with advertisers. So for instance, last year we announced relationships with 28 ad buyers, including GroupM, Havas, and Horizon Media, a number of advertisers as well. And I think a great metric 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%. So, meaning, you know, we grew on average each of those partners by 24% last year. So, very sticky and high growth part of our business. I want to ask you about another theme in your business, which you mentioned on your last earnings call, which has been sort of a stealth business opportunity in the industry, but is getting a lot more press this year. This has to do with retail advertising, retail media advertising. I wanted you to explain for our listeners exactly what this is. Sure. Retail media or 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, right? So, 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. And the reason they're doing this is because they're sitting at the confluence of a couple of trends. Number one is that typically in a retail or transaction environment, a user is sharing their identity with the retailer, right? So if you're shopping online or you're engaging in a DoorDash or an Uber transaction, they know exactly who you are because you need to log in for payment and for delivery of products and services. Number two, because of the growth in

internet consumption generally, a lot of these businesses have pretty significant audiences, right? So if you think about an Uber or a Walmart or somebody like that, Target, these are all people that are participating in retail media. You know, they have very scaled, not only brick and mortar, but of course, online, you know, properties or presence. And then third is that advertisers are looking for high quality environments in which to transact. And in particular, in this kind of economic environment, they really want to be able to measure what's the return on ad spend, right? So, in high-growth kind of 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, you know, $10 million on advertising, they want to know that they got a very clear return on that. And in retail media, you can very clearly measure the outcomes, right? So you can see that, okay, I showed this person an ad and did they actually click or did they transact? Did they purchase? And what was the ROI on that? And so this is, I think, a really exciting opportunity. We see it as really about a $15 billion market opportunity. It's growing in the mid-20s percentage range. You know, Amazon obviously is very deep in this space. You know, they have a $30 to $50 billion advertising business at this point. And so, 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. And so, now they're looking for technology partners. And we think we have a lot to offer in this space, given that we focus on, you know, 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, you know, across mobile app, mobile web, you know, desktop, connected TV environments. So all of these are in play. And of course, we have deep relationships with agencies and advertisers through our focus on supply path optimization. So we think all of that is a compelling opportunity for us to participate in retail media. And so 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 media. 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!