They call it first-mover advantage for a reason: The company that leads the way shapes the game. But that doesn't always mean that it wins the game. So while Amazon (NASDAQ: AMZN) grabbed the initiative by upgrading the two-day free shipping perk at the core of the Prime loyalty program to one-day free shipping, its rivals were of course able to respond, as Walmart (NYSE: WMT) did by declaring that it would offer free one-day shipping on 220,00 items from Walmart.com.
In this episode of MarketFoolery, host Mac Greer and senior analyst Jason Moser discuss the latest changes to the e-commerce landscape. They also dig into the reasons Disney (NYSE: DIS) is paying a pretty penny to take total control of Hulu right now, even if it's not buying Comcast's actual stake in the company until 2024. And they reflect on the troubles fashion apparel seller Ralph Lauren (NYSE: RL) is having domestically.
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This video was recorded on May 14, 2019.
Mac Greer: It's Tuesday, May 14th. Welcome to MarketFoolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analyst Jason Moser. Jason, it is just you and me!
Jason Moser: Hey, man! Just the two of us!
Greer: Just the two of us…should we sing a bar?
Moser: I don't know, I'm not known for carrying a tune.
Greer: Nor am I.
Moser: So we'll just pass!
Greer: OK, good call! Jason, we're going to talk some Disney taking control of Hulu. We'll talk about that in a bit. But first, we begin with Walmart, taking it to Amazon. Walmart announcing that they are offering free next-day delivery on 220,000 of their most popular items. That's nearly double the number of items Walmart offers in its store. Jason, what do you think?
Moser: That sounds like a lot of items, for sure. Two-hundred and twenty thousand. I always wonder how relevant those items are at the end of the day. Apparently, they're basing these decisions on data, that they are the most popular items. Perhaps it works out.
But here's the thing. Walmart has to do this. I understand people saying, "Wow, this is a great move! Good for Walmart!", but they have no choice in the matter. They have to do this. If they don't, they will continue to lose share to Amazon in the retail space. This move at least helps them keep pace.
You cannot dismiss the market's perspective here, though. When I look at these two companies, we talked about this before, when you look at the companies and you look at their annual sales, and what the market's valuing them at, it's really pretty stark, the difference here. Walmart has over $500 billion in annual sales and a market cap of around $285 billion. Now, Amazon obviously is a bit more diversified. There's the Amazon Web Services side of the business. Let's back that out. It's around $26 billion last year, let's back that out. They made a bit more than $205 billion in retail sales in 2018. Less than half of what Walmart brought in. And the market is valuing Amazon at $900 billion. Amazon's already crossed that $1 trillion mark, too. Clearly, the market's telling you where they think the leader in the space is. That's nothing really new. The only way you keep pace with the leader in the space is by doing what Walmart's doing today.
Greer: OK. When you sketch it out that way, do you think that the market giving Amazon such a rich valuation, the market giving Amazon such a rich multiple, is that primarily because of Jeff Bezos? This idea that you've got this visionary leader, and we're going to just crush you going forward?
Moser: I mean, I think that's part of it. I mean, I think that the market is giving Amazon a lot of credit because of this move toward e-commerce, this reshaping of the retail space, the optionality the business has beyond just e-commerce. Things like Amazon Web Services, let's not forget the investments they're making in actual shipping and logistics. I think that's another important point to note here with Walmart and Amazon and all of these other businesses that are playing their role in this e-commerce environment today. I mean, shipping and logistics, that will become a very central part to this. Remember, it was just a few holiday seasons ago where FedEx and UPS weren't really able to handle the volume that came in during the holiday season primarily from Amazon. That led Amazon to start making more investments in that shipping and logistics market, which is a hundreds and hundreds of billion-dollar opportunity as well. I imagine that this is going to be additional volume that flows into UPS, FedEx, probably the USPS in some way. So, how our shipping infrastructure handles this? That's going to be interesting to see as well. But there's no question that Amazon has been planting a lot of seeds along the way there as well.
Greer: It's worth noting that on Tuesday, Walmart said that it has been building out a network of distribution centers. If they're going to ramp up this next-day delivery, it's going to, to your point, require some serious, serious distribution.
Moser: It is. That's a great point. I think a good thing to note when it comes to Walmart is, they do have a tremendous advantage in the physical presence that they maintain already. I mean, having that physical network of stores all over the country, all over the world, that helps. You can leverage that. We see a lot of companies trying to do that ship-from-store, omnichannel type of strategy. Walmart can do that, they can build out these fulfillment centers or distribution centers in line with the physical presence they have all around the country, and the world, really. The investments have been made there. I mean, I think a lot of these investments they're going to make, they're going to be somewhat incremental, from the shipping and logistics side of things, the tech, making all of these things work together in harmony. It's obviously not an easy thing to do.
But I do think that ultimately, what this does, it puts the consumer in a really great position. Amazon, one thing that they've done very well is to breed a very loyal customer base through that Prime relationship. Now they're making bigger promises. They're telling you they're going to do things even better. If for some reason, they don't live up to that promise, now the consumer can say, "Amazon just screwed me here. They said they were going to get this thing to me next day and it wasn't next day. So you know what, I'm going to take my business over to Walmart, because there's another option now." I mean, really, there wasn't another option before. But now there is an option. That could be interesting to see.
Greer: OK, speaking of options, let's talk about it from the investor angle. When you look at this move by Walmart, and when you think about the next 10 years, do you think Walmart and Amazon can both be market-beating stocks? Is there room for both Walmart and Amazon to beat the market? Or do you essentially have to choose one?
Moser: I don't think you have to choose one. I think that they both serve their own roles in the world of commerce. I think they could serve their own roles in the portfolio as well. Walmart, clearly an older company. There's an argument to be made there from an income perspective. I mean, that's going to be a fairly steady, reliable dividend. They have a business model that can certainly afford it. Amazon obviously doesn't pay a dividend. But they've really focused on just investing that money back in the business. Perhaps there's still some growth to be had there as well.
I do feel like, part of me looks at Amazon and thinks, how much bigger can this thing really get? But when you consider the fact that Walmart has $500 billion-plus in annual sales, and Amazon is really about half of that, I think that answers the question there. So it seems to make sense to hang onto those Amazon shares. And I think that Walmart could serve as a nice little bit of a defensive play that works in tandem with that.
Greer: Now let's talk some Disney. Disney is taking full control of Hulu, effective immediately, the company's announcing on Tuesday. Now, Jason, Comcast is the parent company of NBCUniversal, which has a 33% stake in Hulu. Comcast has an agreement to sell that stake in Hulu to Disney in 2024 at a valuation of at least $27.5 billion. What do you think of Disney and Hulu?
Moser: Yeah, well, we've talked about this a lot on Motley Fool Money, on MarketFoolery. I think I've said for a while, it felt like everything was ultimately going to revolve around Hulu for Disney at some point. It was just a matter of time before they worked out a deal. I do think the most important part of this deal, at least for Disney, and this had to have been non-negotiable, I would imagine, is that Disney needs full control of this thing immediately. I mean, they do not have any more time to waste in rolling out Iger's ultimate vision here as it comes to — I don't want to say one app, but it really is this family of apps, it's turning into this entertainment universe between Hulu and Disney+ and ESPN+ and whatever comes down the pike for them. But I think those are the big three for Disney. That's what really matters here. Time was of the essence.
Greer: You mentioned Disney+. One of the things that really turned some heads was Disney's announcement that Disney+ is only going to cost around $6.99 per month. That's essentially half of Netflix. What we learned from this story that we're talking about right now is that NBCUniversal now reconsidering the price of their streaming service, which was going to be, what, double of what Disney was going to do?
Moser: [laughs] It was astounding to me that they would even entertain trying to sell that subscription for $12 a month. If we look at Netflix, and you feel like Netflix is a pretty forgettable price, in that you're getting an awful lot for fairly low amount. People can say, "Well, I don't even really remember what the price is." That's somewhere in the neighborhood of $15. I think that pricing Disney+ and/ or ESPN+ in that $5.99-$6.99 range is super forgettable. I think that's a wonderful strategy on Disney's part. People will subscribe and immediately forget that they have it, and they'll just always have it and recognize that they have a lot of value because of the content there. For NBC to even entertain pricing that app at $12 is beyond me. Ten dollars, which is now what they're apparently considering, I still find to be way, way overpriced when you think about what you might be getting with it.
But I do feel like, and I said this a couple of weeks ago, I feel like these legacy networks, CBS and NBC and ABC, their better opportunity, I think their real opportunity is to figure out a way to be a part of that Hulu universe. I think we've hit peak app downloads for folks in the entertainment market. I don't want to download any more apps to watch the content that I want to watch. I don't think you do, either.
Moser: Dan was very clear before taping that he doesn't want to, either.
Greer: Very, very clear. Emphatic, I would say.
Moser: Emphatic, indeed. You could put an exclamation point on the end of every one of our sentences there. I think that for NBC, it's going to be interesting to watch this shake out because their two biggest crown jewels, I guess we could say, would be, Friends and The Office. Those are, right now, on Netflix. We've already seen how the talk is shaking out there. Eventually, NBC's going to take that stuff back. I don't even think that they could take those two crown jewels to support their own app. I think at some point or another, we're going to see NBC try to figure out a way to be part of that Hulu universe. I think that they've done a good job with Hulu in building that Live offering, along with a separate streaming offering if you just want that. They're getting some good original content on there, and ultimately, giving Disney the control to build that thing out the way they want to, I think is going to work out well for them over time.
Greer: Yeah. It's interesting to note that currently, NBC getting around $500 million a year for its content on Hulu. There's some economics that they've got to weigh here.
Moser: Well, there are. You want to ask the question — because for NBC, it's a legitimate question, they have to answer this and think, do we want to be a part of the Netflix universe, which is massive distribution, that tremendous audience, a lot of people subscribe to Netflix. Do you want to be a part of that universe for potentially a shorter period of time and make a lot of money up front? Or would you rather lay the groundwork to be a part of that Hulu universe for a much longer period of time, even though you may not be making as much money up front on some of those most valuable properties? It's that long-term investor vs. the short-term investor. They're going to have to answer that. I would always opt for seeing the forest for the trees there and go for the longer view. Regardless, I mean, I think this is all shaking out essentially how we thought it was going to shake out. Disney gets ultimate control of Hulu, which is what they always wanted. Comcast and NBC gets a nice little put option there on top of it all in. I think it's a deal that works out well for both.
Greer: OK, Jason, let's close with what has turned out to be a bad day for Ralph Lauren, the company behind Polo and Chaps. I used to wear Chaps. Woof.
Ralph Lauren, better-than-expected earnings, but a decline in North American sales. And that seems to be the story that the markets are focusing on. Shares down around 7% at the time of our taping.
Moser: I can't say I ever wore Chaps cologne, but man, I had a lot of Polo gear in my high school days. Not so much anymore. So maybe that's speaking a little bit to the tough times Polo and Ralph Lauren are having. Listen, retail is really tough. We talk about this all the time. It is a brutal market, and it ebbs and flows. I do think it's interesting to note the challenges that Ralph Lauren is facing in North America. And that is something we've talked a lot about recently with Nike and Under Armour. North America has been a real point of weakness for Under Armour lately, whereas for Nike, it's actually been a point of strength. I mean, Under Armour's sales in North America were down a few percent this last quarter; Nike's were up about 7% or 8%. Ralph Lauren, sales in the North American segment were down 7%. Comps were down 4%. Six percent decline in digital sales. I mean, it's not apparently just Under Armour, there are some retailers who are having a tough time here domestically. Thankfully for Ralph Lauren, they do have Europe and Asia to fall back on. Those parts of the business were doing better. Gross margin was down incrementally. The balance sheet is in good shape with a net cash position around $1.3 billion. And they do yield 2% on the dividend, which is sustainable, they can totally afford it.
When you look at the stock price today, even with the sell-off, and you compare that to the expectations that Wall Street has set for this fiscal year, the stock is trading around 14.5 times full-year estimates, which isn't really crazy either way. And I think the thing that probably tips me a little bit more in favor of owning the stock is the fact that Ralph Lauren still owns about 22% of the shares and ultimately all of the voting rights for practical purposes. I feel like he's got a pretty good track record at this point of building a solid business that's done well over the course of time. I don't think he's going to do anything stupid to drive into the ground. I think he's very proud of what he's done and the brands that he's built. I don't know that I look at any retailer as the buy and just hold. But I do look at retailers and think, if you can find good prices to get in on them and then be OK with pulling the trigger and selling when things get out of control, then it's worth a look. And I think Ralph Lauren might just be worth a look today.
Greer: OK, well, let's close with our desert island question. And Jason, it's just you on the desert island. And you've got these stocks, and you've got to decide, if you're going to buy one of these stocks and own it for the next five years, which one are you buying? We've got Walmart, Amazon, Comcast, Disney, or Ralph Lauren.
Moser: Well, I mean, I'd have to eliminate Ralph Lauren, because I never want to commit myself for five years with any retail stock. Man, I think I'd have to go with Disney. I think that you've just got too many projects coming to the surface here, too many ways to win. Just, man, Disney is a beast, and I think it's just going to keep on winning for a long time.
Greer: Disney over Amazon?
Greer: Wow! That surprises me.
Moser: Well, you know, I look at Amazon and I just kind of wonder, how much bigger is this thing going to get in the near term? I mean, I think the market's giving it a lot of credit today. I mean, I own shares. I'm not regretting that whatsoever, and I'm going to hang on to them. Ironically, I don't personally own shares of Disney. Now, my daughters do. But maybe this Hulu deal is what lights a fire and gets me to buy a couple of shares.
Greer: OK, well, as always, people on the show may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.
Now, before we go, iconic singer and actress Doris Day died on Monday at the age of 97. Dan Boyd, you give me a hard time about my fascination with the 1970s. Is that fair? Is that fair?
Dan Boyd: Yes, Mac, that is fair.
Greer: OK. And I will say that it's deserved, because I am obsessed with the '70s. But I also want to say that Doris Day was an icon long before the 1970s. She was huge! Singing and acting. Dan Boyd, what do you know about Doris Day?
Boyd: Absolutely nothing!
Greer: OK. That's what I was afraid of. So, as we wrap up here, we're going to start your Doris Day education with probably her best-known song. I want to preface this. I want to ask you a question. Are you OK with melancholy?
Boyd: [laughs] Well, I should hope so. I've had plenty of it in my life so far.
Greer: OK. Because this is a happy melody, but there's some melancholy here. So just roll with it and let it just wash over you.
Boyd: If I made a joke about Mellon Collie and the Infinite Sadness, would you get it?
Moser: Oh, I totally get it.
Greer: Is that Smashing Pumpkins?
Boyd: Yes, it is!
Greer: All right! That's not even 1970s! OK. Dan Boyd, play us out! Jason Moser, thanks for joining me! That's it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We'll see you tomorrow!
[Doris Day singing "Que Sera Sera"]
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jason Moser owns shares of Amazon, NKE, UAA, UA, and Walt Disney. Mac Greer owns shares of Amazon, NFLX, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, FDX, NFLX, NKE, UAA, UA, and Walt Disney. The Motley Fool recommends CMCSA. The Motley Fool has a disclosure policy.