Walmart (WMT) is moving to strengthen its advertising and media business to compete with Amazon Prime (AMZN).
On Tuesday, the company confirmed plans to acquire the smart TV maker Vizio (VZIO) for $2.3 billion, or $11.50 per share. Experts say the move should accelerate its retail media business, Walmart Connect, which grew fourth quarter sales by 22% year over year in the US.
Walmart's stock gained 3% in afternoon trading on Tuesday following the company's quarterly results and deal announcement. Vizio's stock surged by more than 15%, while its rival Roku (ROKU) fell nearly 7% as investors speculated the streaming tech play would lose market share.
America's largest retailer made it clear that it sees Vizio as a big play for data and advertising power.
"[Advertising] is a fast-growing, high-margin part of our business," Walmart CFO John David Rainey told Yahoo Finance Live on Tuesday (video above). "And what this deal with Vizio does — it’s very complementary to what we were doing organically. It allows us to use their operating system ... to provide a new channel to actually provide better service to our customers and connect to them with data."
The acquisition would be a "massive opportunity" for Walmart, Wedbush analyst Alicia Reese wrote in a client note prior to the announcement. In part, that's because it would allow Walmart to "leverage TV viewership data" to market its products across its ecosystems.
Telsey Advisory Group senior managing director Joe Feldman said the consumer data "is quite valuable" as Walmart looks to grow its ecosystem, especially its Walmart+ membership platform, and compete with Amazon.
Walmart is "trying to build something like an Amazon Prime; this could be a way towards doing that," Feldman continued.
TD Cowen senior research analyst Oliver Chen agreed, telling Yahoo Finance Live that "digital advertising is the future of Walmart." He highlighted that TD Cowen sees 70%-plus margins in digital advertising, making Walmart not just a major retailer but a "tech company as well."
Walmart may also offer direct e-commerce sales on the connected TV platform, another key area of growth as consumers continue cord-cutting, Reese noted.
"There is a marketplace opportunity in third-party selling, and there's also a big digital advertising opportunity," Chen said. "Vizio Connect will help enable this given that they have an operating system that already has about 18 million members — the SmartCast system."
As for Vizio, Needham & Co. media analyst Laura Martin, who downgraded her rating on the stock to a Hold believes there will not be a higher bidder, said this deal is a win-win for Vizio.
Martin likes the deal because it represents a premium to Vizio's share price, which stood at $7.40 prior to rumors of the acquisition. On Tuesday afternoon, the stock traded near $11 per share.
Walmart has a track record of taking some risks with acquisitions under the leadership of CEO Doug McMillon, which include Jet.com (eventually discontinued), Flipkart (not yet profitable), and Moosejaw and Bonobos (later resold).
This could be another example of Walmart's "interest in learning and growing its digital capabilities while clearly [being] willing to take some flyers," JPMorgan analyst Chris Horvers wrote in a note to clients.
Despite the increased scrutiny over M&A deals, Horvers doesn't believe the deal would raise antitrust concerns. "Consumer electronics is one of the most competitive markets in the world," he said, and Walmart's private-label TV brand "does not have anywhere near the share of Samsung, TCL, LG, etc."
Martin agreed the deal would get regulatory approval, as did Walmart's Rainey.
"We operate in a complex and highly regulated environment," Rainey told Yahoo Finance Live. "We think this deal makes eminent sense, and it ultimately allows us to better serve our customers."
It could also provide a lasting positive impact on the company's bottom line.
In a note to clients, Stifel managing director Mark Astrachan wrote that Walmart Connect and digital media have gross margins meaningfully above the company average, "providing earnings flexibility."
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