On this MarketFoolery podcast, host Chris Hill and Aaron Bush of Motley Fool Rule Breakers check on two of the largest retailers in the world: Wal-Mart (NYSE: WMT), which boosted its e-commerce revenue by 67% year over year last quarter, and Alibaba (NYSE: BABA), which managed to increase its mobile monthly active user numbers by 24% -- to 530 million. That's a lot of customers. What's next for these two and for retail in general? The Fools discuss.
They also answer a listener's question about the future of esports in the wake of some remarkable wins by an AI bot at a popular video game tournament. (Spoiler: Gamers aren't going to quit competing against people; the evolution of machine learning styles is the real story.)
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A full transcript follows the video.
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This video was recorded on Aug. 17, 2017.
Chris Hill: It's Thursday, August 17th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today ... you know what, Aaron Bush works on so many different services here at The Motley Fool that I hesitate to name them all. But, Aaron Bush here in studio. Thanks for being here!
Aaron Bush: Yeah, thank you!
Hill: We've got retail, and we've got not just retail but two of the biggest retailers in the world reporting earnings. We've got Wal-Mart and Alibaba, and we're going to dip into the Fool mailbag to talk about esports. But let's start with Wal-Mart. Their second quarter profits and revenue came in higher than expected. Their online sales up 67%. The stock's still down a little bit today. But if nothing else, the online sales is growing -- it's not just that it's growing, it's growing significantly.
Bush: Yeah, and without a doubt, that's a good thing. The way I personally feel about this quarter is, I'm happy it wasn't awful. That's just because there's so much bloodshed out there these days, I'll take 2% revenue growth. I feel pretty good about that when it comes to a big box retailer. I mean, pretty clearly, 2% revenue growth, most of that was from comps and traffic increases. There were some price increases along with that. They opened 16 new supercenters over the past year, so, still growing. But I will give Wal-Mart credit for what it's doing in e-commerce. Over 60% growth there, it's impressive. Now, that is coming at a cost. We are seeing that margins are slipping, free cash flow is slipping. So, there is some cost to that growth. But they are making progress on that front.
Hill: But don't you think that they would prefer that trade? If you're Doug McMillon, the CEO, wouldn't you rather trade margins for putting up 67% growth, as opposed to, "Well, online sales grew 15%, but our margins held?"
Bush: Yeah. I think it's definitely important for them to take the short-term hits over a really big long-term hit, if they're completely unprepared in all of this. We were talking a little bit beforehand, they acquired Jet.com. Marc Lore, who ran Jet.com, now runs Wal-Mart's e-commerce operations. I think he's making the right moves here, and without a doubt improving the way that things are working. I also think, as the online transition occurs, it does inevitably slow down Wal-Mart's inevitable decline. But I'm still a little paranoid, still a little worried. But it's good to see things moving in the right direction.
Hill: And as you said, it's good to see this, not that we are wishing ill on any traditional bricks-and-mortar retailer, but I think, if I can speak for you, we're both rooting a little bit harder for Wal-Mart just because of how big it is. And, you mentioned to Jet.com acquisition, there were plenty of people including some in this building who, when they made that acquisition, threw up their hands and said, "What are they doing? Why are they spending $3 billion on that? It's not going to work." But, I think the combination, I'm already forgetting the guy's name from Jet.com, the founder there ...
Bush: Marc Lore.
Hill: Marc Lore, between him and the leadership of Doug McMillon, the CEO of Wal-Mart, they are moving it the way they need to.
Bush: Yeah, I think so. Just to touch on a couple things that I'm still a little paranoid about, I think this postpones some of Wal-Mart's decline. But I do think that over time, the majority of the shift has yet to take place and the ripple effects of what that means are going to be significant. So, for one, what we're seeing right now is that Wal-Mart is relying pretty heavily on acquisitions to boost its online offerings. Jet.com set the precedent, but they've made several other acquisitions, too, mostly on the smaller side. Shoebuy, Moosejaw, ModCloth, never heard of any of those, Bonobos. So, on one hand, I think that's smart, because that acquires new customers, sometimes from outside the Wal-Mart sphere, new data to work with, smart employees to bring in. But on the other hand, I just wonder how good of a job Wal-Mart will do to tie all of those together under the same roof. Aggregation is really important when it comes to being an e-commerce titan, and I'm just not sure if they'll be able to connect everything super well. I think that might be a stretch, but there's a lot of work left to do there.
My largest concern, though, is infrastructure. Physical retail takes an entirely different approach to infrastructure than e-commerce does. It's just two completely different worlds. For one, we're already seeing the margins falling because Wal-Mart has to build brand new infrastructure to build its online capabilities on top of its physical presence. So, that's a much higher infrastructure cost to remain relevant to the same group of people. And as physical retail revenues transition into online revenues, that puts really big cost pressure on the physical retail infrastructure, the stores, the warehouses that are connected to that. So, I can totally see, over the next five to 10 years, Wal-Mart could knock it out of the park with their online successes, and keeping this momentum going. But what that means is, there's going to be some issues on the physical side, and they'll have to figure out what to do with underperforming stores and figure out how to shut things down or sell things off. And it could lead to more headaches.
Hill: I can't believe you've never heard of Moosejaw. That is as quality a name as you're going to get when you're in the business of outdoor gear, snowboarding, all that sort of thing. Moosejaw? Come on, that's a great name.
Bush: Maybe I just need to branch out some more, go on an adventure.
Hill: You know what? It's a lot better name than Bonobos, or however you pronounce that. Let's move on to Alibaba, the e-commerce giant in China. First quarter profit came in north of $2 billion, and shares of Alibaba up around 4-5% today. This is what Jet.com wants to be when it grows up.
Bush: It's the antithesis of Wal-Mart right now.
Hill: It's not the antithesis. But if you're Wal-Mart, if you just keep piling up quarter after quarter of 60% online sales growth, eventually you're going to get to $2.1 billion. But, again, this is what Jet.com wants to be when it grows up.
Bush: Yeah. I felt really positive looking into this quarter. I'll just start by saying that Alibaba's mobile monthly active users, that metric was up 24% year-over-year to about 530 million. So, to frame that up, about 55% of China's population are internet users, that's about 750 million people. If you take out kids and such, you see that Alibaba is really at the point of ubiquity right now. That just builds a really powerful network effect, and because of that network effect, people just start to use Alibaba and their websites and services more and more. So, this quarter, you see exactly that. Revenue rose 56%, and most of those gains did come from the commercial operations, so, Tmall and Taobao. More big brands are jumping onto the platform. And naturally, because of that, consumers are engaging more with its apps. Gross merchandise volume is spiking. So, at the core, Alibaba is killing it, margins are scaling, cash flow is rising, they're getting the job done.
Hill: How key in your mind is Jack Ma to this company? He's clearly a tremendous business leader, but I don't know that I get the sense that he is as crucial to Alibaba right now -- obviously, he's gotten Alibaba to where it is -- but I don't get the sense that he is as crucial to Alibaba as, say, Jeff Bezos is to Amazon in this regard: I think if Jeff Bezos announced tomorrow that he was leaving as CEO, he was basically walking away from Amazon.com, I think that stock takes a much bigger hit than Alibaba takes if Jack Ma announces that he's walking away.
Bush: Probably. I think I agree with that. I still think that he is important for the reason that, similar to Amazon, Alibaba is starting to branch out of just pure retail. As they scale into these new ventures, having a more centralized person up top to manage all of that, allocate resources, decide strategically for the whole what to do, I actually think that position starts to be more important. Whether or not that's solely Jack Ma or not, or if it's more of a group of people, I don't really know. But I actually feel like it's going to be more important just from a resource allocation perspective. So, actually, what I think is particularly interesting about Alibaba is, similar to Amazon, the new things that they're venturing into. Just the name two or three that they highlighted this last quarter, for one, similar to Amazon, Alibaba Cloud is gaining more traction. The similar cloud services, cloud computing growth that we're seeing here and the U.S. --
Hill: Are they also calling it AWS for shorthand? Alibaba Web Services?
Bush: They could, they definitely could.
Hill: That would get confusing.
Bush: Yeah, a little bit. But right now, that's only 5% of the total business, but revenue doubled year over year for that. So, if that keeps up, that actually becomes a larger percent of the business, and the economics of it pour through to the bottom. They also acquired a company called Intime Retail Group, which is a leading department store and mall operator in China -- it is kind of odd if you think about it. I think what Alibaba is doing there could end up being a really interesting case study in how you connect the online and digital retail worlds to create the ultimate omnichannel experience. They're investing heavily into original content, like most big tech companies are here, like most big tech companies are there. They're trying to expand internationally, they're partnering with big companies like Marriott. So, they're doing a ton of stuff, and I guess my point here is, the core business is on fire. And those results are providing the resources to move in all of these new directions, similar to how we've seen Amazon here. I actually do think that makes leadership more important than it's been in the past.
Hill: Do you think there comes a point in the next, say, five years where they make a significant push into North America?
Bush: No, I don't think so. I think, more in Asia, there are several countries around there that are probably better targets to tap into. They would probably try to go after even Latin America or Australia before they tried to attack Amazon's home turf.
Hill: Our Twitter handle, and some of you may actually be watching us right now on Periscope via the Twitter, this is actually the first episode of Market Foolery that we are live streaming on Twitter and on Facebook. Our handle is @MarketFoolery. Question came into us on Twitter from Dan McGirt in Atlanta. He sent a link to an article and included the question, "So, did esports just die?" The article that he sent was about an artificial intelligence program that beat the human competition at a world championship video game contest, and it reminded me of years ago when Big Blue, the server computer from IBM, won a global championship and that was the whole thing, computer beats man, that sort of thing. Going back to Twitter for a second, when we tweeted this out that we were going to talk about this, immediately we got some reaction from listeners from the gaming community who were just like, "No." But, you are someone who follows esports and the video game industry. First, what was your reaction to the article?
Bush: I mean, I think it's fascinating what they're doing. I think this is a stepping stone for AI. It was OpenAI that did this. And if you couldn't think he could do more, this is Elon Musk's brainchild for developing --
Hill: He doesn't have enough to keep him occupied? He has to do this, too?
Bush: I guess not. He just has to build the best AI systems, too, I guess. I mean, I thought it was pretty interesting. It's a completely different narrative from esports. It's just that AI training is done in games. But the news is very significant in its own way. I think the best way to look at it is rewind a little bit. When the first computing system beat chess, that was because it was able to data crunch all the possible moves and outcomes. Probably a year and a half ago or so, when Alphabet's AlphaGo topped the world's best player in Go, that was important, because the possibilities of Go are so vast that it can't really be data crunched. So, the machine has to build its own intuition of sorts. That intuition, being able to make decisions under imperfect information, that was the breakthrough.
So, now, stepping from Go to Dota, which is a big game in the gaming world, that's a big deal, because it's a much more complex environment that operates in real time. I will note, the headlines are maybe a little bit misleading in the case that this particular Dota bot can only play one on one when the game is typically played five on five. And it can only play as and against one particular character out of more than 100 that you can choose from. So, it is pretty limited, but within that niche, that's still really impressive. I think it's important to remember that AI testing is occurring in games for a reason. Games are sandbox ecosystems with limited and particular rule sets. And the point of AI here is not to master the games. It's about learning how to master increasingly complex environments. And the more complex things get, that is breakthrough, and that is the fascinating story here.
Hill: Two questions around esports. When do you think the next advancement in essentially popular culture immersion will happen? And what form do you think that takes? Do you envision in the next few years that a significant television network puts esports on prime time and e-sports leagues are signing pretty big deals, not on the level of the NFL or something like that. But, is that what we should be looking for, for anyone who's looking to invest in this industry? I'm just wondering, what else, what clues should we be looking for?
Bush: I think it'll take form in a couple of different ways. One is going to be leagues gaining traction. For example, Blizzard is just now launching the OverWatch league. Seeing how that gains traction will be telling. There's also NBA 2K, which is Take-Two's game, that is partnering with the NBA to create its league. So, now we're seeing lots of big money from those big franchises pouring in there. So, seeing how fans respond to that is important. But no, I actually do think there will be -- maybe not necessarily ESPN prime time -- but BAMTech, which now ESPN and Disney owns the majority of, they have an exclusive deal, a $300 million deal with League of Legends. This is the largest game in the e-sports world, to stream those tournaments and championships. So, definitely, it's starting to cross paths with the big players, how those big players push it will determine how pop culture responds.
Hill: Two housekeeping notes before we wrap up. First, thank you to Keith Erickson, who sent me a very nice handwritten note. I really appreciate that, Keith. And thank you to Jeffrey and Ryan, two listeners who are road tripping, two guys from Brooklyn, who are road tripping to Kentucky by way of Washington D.C. and Pittsburgh and taking what sounds like a really nice road trip. Anyway, they stopped by Fool HQ earlier in the week, and dropped off an amazing chocolate babka from a bake shop in Brooklyn. It was delicious, and it disappeared very quickly. It was one of those things where it's like, I'm going to cut myself a piece of this, and I just put it in the fifth floor cafe and it was gone in no time. It was great. Jeffrey and Ryan, if you're listening, I hope you guys are having a great trip. Aaron Bush, thanks for being here!
Bush: Yeah. Thank you, Chris!
Hill: As always, people on the program may have interests 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. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you next week!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Aaron Bush owns shares of Activision Blizzard, Alphabet (C shares), Amazon, Facebook, Take-Two Interactive Software, Twitter, and Walt Disney. Aaron Bush has the following options: long January 2018 $80 calls on Walt Disney. Chris Hill owns shares of Amazon and Walt Disney. The Motley Fool owns shares of and recommends Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, Marriott International, Take-Two Interactive Software, Twitter, and Walt Disney. The Motley Fool has a disclosure policy.
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