Why Walmart-Vizio deal could be 'new nexus' for advertising

Shares of Walmart (WMT) move higher Tuesday morning after the big-box retailer posted fourth-quarter earnings results, showing quarterly revenue gains of 6% compared to the previous year. This figure was further supported by a 23% gain in e-commerce sales. Additionally, the company announced it has entered a deal to acquire Vizio (VZIO) for $2.5 billion.

TD Cowen Senior Research Analyst Oliver Chen joins Yahoo Finance to discuss Walmart's earnings, the potential Vizio deal, and how it can impact Walmart's business going forward.

Explaining why Walmart's deal with Vizio can be big for the company, Chen says: "There is a marketplace opportunity in terms of third-party selling [and] there's also a big digital advertising opportunity. And Vizio Connect will help enable this given that they have an operating system that already has about 18 million members, of a Smartcast system, and this will help accelerate digital advertising, which is a very, very high-margin business. 70%-plus margins, as we model it, and it's growing at 30%. So digital advertising is the future of Walmart and we see this as a tech company, as well. That's why it is one of our big ideas."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

- Walmart shares climbing higher in the premarket, with revenue jumping 6% from a year ago helped by a 23% boost in e-commerce sales. The retail giant also announcing that it has officially agreed to acquire Vizio in a $2.3 billion deal. Oliver Chen, TD Cowen senior research analyst joins us now with more. Oliver, great to see you here with us this morning.

First and foremost, you read through this report, ultimately, investors pleased with what came through. And ultimately, now, a larger kind of consideration around what this means for the consumer. What's your read through on the consumer from this Walmart earnings report?

- Yeah, Brad, we're excited Walmart is our top idea. It's great being here with you and Seana this morning. The consumer is facing cross-currents really. The consumer still has spending power but is looking for extreme value. Walmart is offering that.

At the same time, consumers are looking for convenience and valuing time. That's a big factor as well in terms of Walmart offering many convenient factors such as drone pickup and delivery, curbside pickup, and the marketplace model. All these things are really working together in nice harmony as well.

- Oliver, one of the big headlines out of this report here this morning was the fact that Walmart is buying Vizio for over $2 billion. I'm curious, from your perspective, obviously, the analysts perspective here, does this make sense? And if so, why?

- Yeah, we're excited about this. We call it the new nexus. And as we think about Walmart, there's a marketplace opportunity in terms of third-party selling. There's also a big digital advertising opportunity. And Vizio Connect will help enable this given that they have an operating system that already has about 18 million members on the SmartCast system.

So this will help accelerate digital advertising, which is a very, very high margin business. 70%-plus margins as we model it, and it's growing at 30%. So digital advertising is the future of Walmart, and we see this as a tech company as well. That's why it is one of our big ideas.

The other part of this, Seana, is artificial intelligence. So Walmart is already using generative AI and computer vision for more accurate inventory management, as well as the customer experience in terms of generative AI helping apps and helping employees locate goods in store. This is really happening. In addition, they mentioned drones on the call.

They were already delivered 20,000 packages through drones. That is 15-minute delivery speeds. And higher household incomes as well as Walmart+, and whole ecosystem is working as well as a flywheel to help drive sales and margins.

- What type of pricing do you think that they need to put into the market with this Vizio service, and in order to strike the right tone among the consumers that they've already seen on the brick and mortar side, on the e-commerce side, and, now, on that digital streaming side?

- And we've been excited about Walmart+ and that's seen a lot of momentum. Furthermore, higher household income story has been a big part of the story too in terms of that cohort really appreciating delivery marketplace, as well as a lot of the general merchandise. We will see-- I think Walmart will offer exceptional value and use advertising as a methodology to both generate profits and help subsidize some of the media as well.

- Oliver, going back to what you were saying earlier just about the consumer right now, and what these results tell us about the state of the consumer, we are starting to see, although inflation obviously remains very sticky, prices of certain items are starting to come down just a bit. If we see more of this deflationary type of environment take hold, what's the impact on Walmart? And what do you think that that ultimately does to demand here in the long run?

- Yeah, Seana, it's something we're looking at. Quantitatively, in terms of the top line, what's been happening is disinflation or deflation. That definitely takes away from revenues. However, the consumers in this tug of war between essentials and needs versus wants. Therefore, the positive impact of disinflation is the consumer may have extra dollars freed up for general merchandise. General merchandise trends have been bumpy and negative-- home, big-ticket, seasonal, apparel, it has not been great given the inflation that we've been seeing.

So we're looking forward to disinflation prices moderating, as this will free up dollars for consumer discretionary, which are much higher margin, generally. So it is this tug of war. On the one hand, we have a tight labor market-- low unemployment at 3.7% and wage growth at 5%, but inflation is still running around 3%. And consumers are using credit cards more and have less liquidity. These are all factors to watch.

Consumers are definitely looking for value. That is partly evidenced by private label and the momentum we see in private label as well and the deep value of that private label offers. There's a big gap between private label and national brands as well.

- All that considered, Oliver, you mentioned Walmart as a technology company, how does that trickle through to the multiple, as well, from your perspective? And I mean, right now, we're sitting at a PE ratio of about 28, 29.

- Yeah, Brad, we like it because Walmart's offense and defense. On the one hand, it's very defensive in terms of being the US's largest grocer with tons of value. On the other hand, it's offensive in terms of this whole flywheel-- marketplace, AI, digital advertising. It should only get more exciting in terms of this whole ecosystem coming together and driving convenience and competitiveness.

Over the long-term, we've always loved bricks and clicks. So the integration of physical and digital is the secret formula for really winning over the long-term and also managing customer acquisition cost. Being physical is very powerful. 90% of America is within 10 miles of a Walmart. And as we think about Walmart more broadly, health care, financial services, pharmacy, these are all aspects that will work together in this whole flywheel.

- Oliver Chen, always great to get your insight. Again, Walmart shares moving higher on the heels of this report. Oliver, thanks so much for breaking that down for us.

- Great being with you both. Thank you. Good morning.