What is the Potential Upside if Wal-Mart Gains Ground on iTunes?
Wal-Mart (NYSE:WMT) is the world’s largest retailer, competing with companies like Target (NYSE:TGT), Costco (NASDAQ:COST), Amazon (NASDAQ:AMZN) and Best Buy (NYSE:BBY). Our price estimate for Wal-Mart stands at $65.42, which implies a premium to market price.
See our full analysis and $65.42 price estimate for Wal-Mart
Wal-Mart has been making headway in the sale of entertainment items like music and movies. The company began a more aggressive push into the online movie market when it acquired Vudu in 2010. Best Buy, notably, made a similar move with Sonic Solutions. Although there is a buzz around Wal-Mart being a potential challenger to Apple’s (NASDAQ:AAPL) iTunes (the current online music king), we estimate little upside to the company’s stock value form this segment.
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Electronic Movie Sell-Through and Wal-Mart
According to a recent article published by iSuppli, a market research firm, iTunes maintained its top share in the electronic movie sell-through and internet video-on-demand market in 2010. iTunes had a share of 64.5%, followed by Microsoft (NASDAQ:MSFT), with 17.9% market share, and Sony, with 7.2%. The balance was captured by other players. [1] Microsoft gained significant share in late-2010 as a result of its successful launch of Kinect, which boosted movie revenues.
While iTunes faces near-term threat from big names like Microsoft and Sony, iSuppli believes that Wal-Mart could become a serious competitor to iTunes in the future. [1] Wal-Mart is already a source of significant income for studios by selling their DVDs and has massive scale to be competitive in electronic sell-through as well. Wal-Mart has offered promotional pricing and support for a large array of devices.
Added Value is Minimal
Although iSuppli’s view indicates that Wal-Mart could be a threat to iTunes in the long run, the implied upside to Wal-Mart’s stock value is minimal. We estimate the rough impact of this scenario on Wal-Mart by considering what iTunes means to Apple’s equity value.
Our Apple model suggests that iTunes constitutes roughly 2.6% of the estimated $393 billion value for Apple. This amounts to a roughly $10 billion business. We estimate Wal-Mart’s value to be close to $243 billion. Even if iTunes were to hand over its massive 64.5% market share and $10 billion iTunes value equivalent to Wal-Mart, the company’s intrinsic value would only see upside of about 4%. Thus, Wal-Mart’s own success in this arena is unlikely to have any material impact on its stock.
Notes:- Apple iTunes Remains Dominant in U.S. Online Movies in 2010, Despite Competitors’ Inroads, iSuppli press release, Feb 7 2011 [↩] [↩]