ResearchThe Weekly (5/24)

The Weekly (5/24)

May 24, 2024

If you’ve been with us for a while, you know we love businesses that look like one thing on the surface but when you dive a little deeper, realize their profits, growth, and oftentimes their forward looking valuations are derived from something completely different. 

It’s a bit of magic that you have to believe stems from finding product market fit, exploring expansion that sits along the same consumer supply chain, all to realize that these new verticals may be even more profitable than the first.

Think: Costco, a big box retailer that’s actually one large subscription service, or a car dealership that’s actually a financing business.

In this episode of the enterprise behind the business, snoozy old Walmart caught our eye.  

Anyone strolling around a branch of Walmart, as a jaw dropping 200 million Americans do each month, will see thousands of goodies being sold. Increasingly, the core business isn’t so much the products sitting on the shelves, rather the shoppers themselves morphing into the product. The world’s top retailer by sales has discovered that there is serious money to be made in selling access to its customers.

The customers are becoming the product.

In the electronics department, every television is highlighting a commercial for a cosmetics brand. The self checkout screens are littered with ads before you swipe your card and even the music over the speakers is occasionally interrupted by a brand located conveniently in Aisle 10. 

For context, Walmart moved more than $600 billion of products last year, ranging from Xbox’s to paper towels. By comparison, its ad operation which brought in $3.2 billion over the same period, could be viewed as a simple line item on the income statement. 

Yet the margins on advertising are so big, and those on groceries so small, that ads contribute an outsized share of profit. For 2023, 7.5% of Walmart’s earnings could be attributed to advertising and analysts estimate that this number is expected to grow to upwards of 13% in the next couple of years.

And they’re putting gas on the fire: their ad business has seen a complete overhaul over the past several years. 

They, of course, offer targeted digital ads on their website and app. The effectiveness of these ads can be precisely measured because they know if the consumer purchases the product and they’re insulated from Apple’s anti-tracking rules given they own the data themselves.

Walmart also recently purchased Vizio in February, a manufacturer of smart TVs. On the surface it seems like an odd acquisition but the intention is clear: targeting viewers with personalized ads. Given these devices are connected directly to the internet, who’s to say you can’t view an advertisement and purchase that product directly on your TV via Walmart’s marketplace?

The final advertising opportunity for Walmart, with perhaps the biggest potential, lies in its vast network of bricks-and-mortar stores. Yes, you read that correctly. Despite owning 10,000 stores worldwide and foot traffic of 200 million people a week, tracking consumers’ behavior is harder offline.

Walmart is working to get smarter here as they leverage payment details to match in store purchases to digital advertising viewership. Combining measurement efficiency with an abundant amount of physical ad space could open an entirely new vertical for their advertising business. A vertical that’s been largely unsolved by peers.

In-store digital advertising remains a far smaller market than the online sort, even though 85% of retail sales in America are still made in person. That imbalance may represent an opportunity: if in-store ads can be made remotely as effective as online ones, a market worth tens of billions of dollars awaits. 

The enterprise behind the business is powering profits and valuations. The mightiest retailer of them all is thinking outside the box and it seems like they may be the latest advertising behemoth with eyes set on the next frontier. 

Have a great weekend,

– Your Titan team


As of writing, AAPL is a holding in Titan's Flagship strategy.

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