Let’s make a deal
05/11/18

Talk to someone about the retail industry these days, and you’re likely to hear some variation on the “brick-and-mortar can’t compete with online” theme (or is that meme?).

True, many storefront businesses, especially mainstream department stores, have been battered by the e-commerce revolution spearheaded by Amazon (AMZN). And the company’s lofty stock price could indeed lead some people to believe it will eventually rule the word, one way or the other.

But maybe not everyone feels that way, and maybe even some “traditional” retailers feel like they can compete in the e-commerce space—Walmart (WMT), for instance. (For those with short memories, Walmart was the company taking over the world before Amazon was.)

With its acquisition of leading Indian e-commerce retailer Flipkart (founded by two former Amazon employees, no less), Walmart has announced it is thinking about the digital future—and thinking big. The $16 billion deal is reportedly the largest in e-commerce history, and one that puts Walmart in the thick of one of the world’s largest retail markets. India has a population of more than 1.3 billion, and its online shopper base is expected to increase from around 60 million to nearly half a billion by 2026.1

Walmart (WMT) vs. Amazon (AMZN), 12/29/2016 – 5/10/18. Walmart daily chart. Amazon daily chart.

Source: OptionsHouse

The essential unfairness of comparing almost any stock to AMZN aside, the chart above shows that during the 2017 leg of the bull market, anyway, WMT did a pretty good job of keeping pace with AMZN: As 2018 was getting underway (vertical line), WMT was up around 42% over the past year, while AMZN had gained around 51%. It was only when the broad market slid into correction in February that their paths really diverged, as AMZN banged out new highs while WMT settled into a trading range near its four-month lows.

Then came the Flipkart news, which knocked WMT out of the bottom of that range on Wednesday with a 3.7% loss. Normally, many traders would likely interpret the downside breakout of a trading range (especially when prices were trending lower before entering that range) as a bearish signal.

It may be, but in this case the “surprise” factor is worth considering. Markets don’t like surprises, and the market wasn’t expecting this deal—$16 billion ain’t chump change, after all. Of course, there’s no reason a company should automatically be rewarded for being “bold.” It’s whether the deal will contribute to the bottom line in the long run—and that’s an issue for long-term investors.

But Walmart isn’t sitting on its hands, that’s for sure, and there are a couple of other factors to consider in terms of price action. Sentiment about the deal appeared to be shifting only a day after it was announced, with some analysts highlighting the long-term growth possibilities vs. the short-term financial hit;2 the stock traded to the upside yesterday.

Walmart (WMT), 6/23/17 – 5/10/18. Walmart daily price chart.

Source: OptionsHouse

Also, the above chart shows Wednesday’s down move took the stock right around the support level formed by the top of the August-October 2017 range, which is also in the vicinity of a 61.8% Fibonacci retracement of the stock’s January 2017-January 2018 rally. (The Fibonacci sequence is the series of numbers that begins with 0, 1, 2, 3… where each successive number is the sum of the previous two numbers: 0+1 = 1, 1+2 = 3, 2+3 = 5, 3+5 = 8, etc. Some traders use ratios based on numbers in the sequence to project price moves, especially retracements. One of the sequence's key properties is that as the series progresses, the ratio of any number and the one immediately after it comes increasingly close to 0.618—the so-called “Golden Ratio” that appears in many natural phenomena.)

Even traders who may expect more downside may be at least looking for a short-term rebound into the recent trading range. Bulls are probably enticed by the thought of the upside momentum that could kick in if the stock pushes back above that range.

A final heads-up: Walmart’s next earnings release is scheduled for May 17 (check the E*TRADE Market Calendar for the latest schedule).

 

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1 The Daily Mail. What is Flipkart? All you need to know about Indian company bought by Walmart. 5/9/18.

2 TheStreet.com. Walmart's Massive Deal for India's Flipkart Is a $30 Billion Stroke of Genius. 5/10/18.