Walmart could be neglecting a key business by purchasing Flipkart
- Walmart's acquisition of Flipkart has investors worried.
- E-commerce is getting increasingly competitive in the US, and Morgan Stanley analyst Simeon Gutman thinks Walmart should be investing more in the US.
- While Flipkart isn't expected to be profitable soon, Gutman does believe there is long-term growth potential in India.
- Watch Walmart trade in real time here.
Walmart's decision to purchase Indian e-commerce leader Flipkart has investors worried the US retail giant is neglecting one of its core businesses: Walmart US.
Walmart announced Wednesday it will pay $16 billion for a 77% stake in Flipkart. Investors did not applaud the news, as Walmart shares dropped 4% on the announcement. But Walmart President and CEO Doug McMillon defended the company's move. "India is one of the most attractive retail markets in the world, given its size and growth rate, and our investment is an opportunity, " he said in the press release for the acquisition.
Still, investors are worried, according to a note from Morgan Stanley analyst Simeon Gutman. "Investors are questioning why Walmart is investing outside the US market (~2/3 of total revenue and ~75% of total EBIT) at a time when Amazon is stepping up its infrastructure/distribution related investments," Gutman wrote.
He added "this investment will pull management attention from the US market at a time when competition has never been tougher."
Amazon has been increasing its footprint in groceries, and its tech-minded approach is forcing most grocers to adapt in an increasingly competitive environment.
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"Walmart is still a distant second in what we see as a two-player omnichannel race in the US market," Gutman said.
Instead of allocating that cash to international ambitions, Gutman said, Walmart should have used it to optimize its third-party marketplace capabilities in order to compete with Amazon.
Still, there is an argument to be made for Walmart's Flipkart investment. While profitability isn't on the cards in the short-term, Gutman sees a long-term growth story in India for Walmart. "India represents a massive long-term opportunity," he wrote. "The Flipkart acquisition effectively prevents AMZN from gaining an insurmountable advantage in this important market."
Walmart is down 15.29% on the year.
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