Is Wal-Mart The SoftBank Of E-Commerce Startups?
May 23, 2018 | Blog

Is Wal-Mart The SoftBank Of E-Commerce Startups?

Understanding the Landmark Flipkart Deal, India’s Largest VC-Backed Exit

Walmart paid $16 billion for a 77 percent majority stake in Indian e-commerce leader Flipkart, implying an exit valuation of $20.8 billion. Flipkart is not only Walmart’s largest acquisition to date but also the largest ever acquisition of a VC-backed e-commerce company in the world. Per Walmart filings, in the fiscal year ended March 31, Flipkart generated net sales of $4.6 billion, more than 50 percent higher than the previous year, on a gross merchandise value of $7.5 billion. Interestingly enough, Walmart supports Flipkart’s plan to eventually go public as a majority-owned subsidiary of the U.S. retail giant. Such a stock offering could represent the largest tech IPO for an Indian company.

Expect More E-Commerce Unicorn M&As than IPOs

Over the past couple of years, the e-commerce industry has consistently witnessed record-setting M&As. Most notably, PetSmart bought Chewy.com for $3.35 billion in 2017, besting the prior record held by Jet.com when Walmart acquired it for $3.30 billion in 2016. Walmart-Flipkart’s union is worth more than 6 times those deals. As the industry matures, we believe M&A deal sizes will get bigger as Amazon, Alibaba, and brick and mortar retailers fight for e-commerce dominance. From 2013 to 2015, only two e-commerce deals per year surpassed billion-dollar mark compared to more than six deals over the past two years. The chart below shows major e-commerce M&A deals since 2014.

E-Commerce Unicorn M&A Deals Since 2013
E-Commerce Unicorn M&A Deals Since 2013
Source: PitchBook Data Inc. and publicly available news reports. Note: acquisitions of some non-retail companies which are sometimes considered e-commerce such as online travel agencies and SAAS companies excluded.

By contrast, e-commerce IPOs have lagged this M&A trend. Shares of Blue Apron and Stitch Fix, two of the most high profile e-commerce companies to recently go public, have also not performed well. Since 2015, M&A deals for e-commerce unicorns outnumbered IPOs 2-1, according to the chart below.

E-Commerce Unicorn Exits and Valuations (IPO Versus M&A)
E-Commerce Unicorn Exits and Valuations (IPO Versus M&A)
Source: PitchBook Data Inc. and publically available news reports Note: acquisitions and IPOs of some non-retail companies which are sometimes considered e-commerce such as online travel agencies and SAAS companies excluded.

Also, Flipkart’s implied valuation of $20.8 billion represents a 35 percent to 50 percent premium above its most recent private valuation range of $13 billion to $15 billion. Post-IPO valuations of e-commerce startups have yielded mixed results.

Expect brick-and-mortar retailers to potentially follow Walmart’s lead

While Walmart’s recent acquisitions may appear like a simple game of “catch up to Amazon,” the company is likely crafting a more subtle long-term strategy. Walmart has purchased digitally native and primarily mobile commerce brands focused on younger consumers, possibly to lure them to its physical stores in the future. In the chart below, we illustrate Walmart’s recent e-commerce focused acquisitions and investments. Clearly, Walmart has increased its deal making over the past couple of years amid growing pressure from online rivals. Walmart’s Jet.com acquisition certainly turned heads in 2016. But consider this: not only is Flipkart Walmart’s biggest e-commerce acquisition to date, the deal is larger than all of Walmart’s previous online retail acquisitions combined.

Walmart’s E-Commerce Acquisitions to Date
Walmart’s E-Commerce Acquisitions to Date
Source: PitchBook Data Inc. and publically available news reports

Flipkart’s acquisition opens updoors for international e-commerce unicorns

The Indian startup ecosystem has rapidly grown over the past decade. American and Chinese companies, including Tiger Global, Softbank, Alibaba, and Naspers, have made organic and strategic investments in over a dozen major Indian startups. In the taxi aggregation market for instance, the Indian start-up Ola competes fiercely with Uber even though they share a common investor in Softbank. As shown below, leading Indian unicorns excluding Flipkart boast a cumulative market cap of over $25 billion and raised almost $12 billion in private funding. We are closely watching these firms, along with rising Indian companies we call “Soonicorns,” because of their innovative business models, rapid growth trajectories, and fund raising track records to date.

Indian Unicorn and Soonicorn Valuations
Indian Unicorn and Soonicorn Valuations
Source: PitchBook Data Inc. and publically available news reports

“India is one of the most attractive [retail] markets in the world” said Doug McMillon, Walmart’s president and chief executive officer (May 9, 2018).

Nevertheless, the current market opportunity for such companies may not justify such lofty valuations. According to Forrester Research, the Indian online retail market totaled $20 billion in 2017 (2.4 percent of total retail market in India), which is still relatively small compared to older, better penetrated markets. But beyond market size, investors really want growth. India is home to a growing middle class, which is fueling household spending growth on par with that of China and more than the mature U.S. market. Over the next five years, analysts predict more consumers will gain access to the Internet for the 1st time than the entire U.S. Internet population. From 2017 to 2022, estimated online retail sales in India will grow more than 150 percent to more than $73 billion. Overall, we believe India’s private tech ecosystem trails its Chinese counterpart by about 8 to 10 years, a possible upside for investors. As shown below, China is currently the leader in the number of e-commerce unicorns and the percentage of total market cap, followed by the United States. Savvy investors should closely watch developments and opportunities in the Indian e-commerce market as the country continues to grow into a formidable economic power.

Geographic Distribution of E-Commerce Unicorns by Number of Companies and by Market Cap
Geographic Distribution of E-Commerce Unicorns by Number of Companies and by Market Cap
Source: PitchBook Data Inc., CB Insights, and publicly available news sources

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Analyst compensation is indirectly based upon the growth and success of SharesPost, Inc., including the overall performance of its subsidiaries, the individualized performance of any such analyst, and the development and progression of the overall research effort. SharesPost, Inc. earns revenue from, among other avenues, brokerage sales, and therefore the analyst may indirectly benefit from research reports that have the ultimate effect of increasing trading activity, either through SharesPost Financial Corporation and/or with SharesPost Investment Management, LLC.

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This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

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Alejandro Ortiz

Alejandro Ortiz

Alejandro is a Research Analyst, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, he was a Valuation Analyst at Duff & Phelps with a focus on TMT industries.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own financial advisors before making any investment decisions. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about the subject matter therein, including all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be during their employ directly or indirectly related to their specific views contained in this report.

Analyst compensation is indirectly based upon the growth and success of SharesPost, Inc., including the overall performance of its subsidiaries, the individualized performance of any such analyst, and the development and progression of the overall research effort. SharesPost, Inc. earns revenue from, among other avenues, brokerage sales, and therefore the analyst may indirectly benefit from research reports that have the ultimate effect of increasing trading activity, either through SharesPost Financial Corporation and/or with SharesPost Investment Management, LLC.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.