Morgan Stanley: Why The Reported Amazon, Walmart Talks With India's Flipkart Make Sense

Two U.S. retail behemoths, namely Walmart Inc WMT and Amazon.com, Inc. AMZN, have launched a bidding war for a controlling stake in India's hugely successful e-commerce company Flipkart, according to Bloomberg.

The two companies have valued Flipkart at $20 billion, and Walmart is ahead in the race, the report said. 

The Analyst

Morgan Stanley analyst Brian Nowak maintained an Overweight rating and $1,500 price target on Amazon. For Walmart, Morgan Stanley maintained an Equal-weight rating with a $99 price target.

The Thesis

India presents the largest greenfield opportunity — with an estimated $200 billion online retail total addressable market in 2027 — as online penetration increases from less than 3 percent of the retail spend in 2017 to 12 percent in the next 10 years, Nowak said in a Thursday morning note. (See the analyst's track record here.)

The analyst estimates that India accounts for a material portion of the "other" international retail business for Amazon, which is likely to drive 30 percent of total revenue growth over the next three years.

Flipkart has a 57-percent share of the budding $15-billion Indian e-commerce market versus Amazon's 30-percent share, Nowak said. 

Amazon's interest in Flipkart is due to the logic that the potential buy would eliminate competition or engender a more rational environment, he said. 

"It could also enable Amazon to scale its budding logistics network faster and more profitably."

Walmart has been vociferous about its intent to gain a strong foothold in the Indian e-commerce market due to the growth opportunity, according to Morgan Stanley. The discount retailer may be keen on building an e-commerce presence in India, according to the firm. 

Walmart is well-penetrated in China, with over 400 stores and a 12-percent investment in Chinese e-commerce retailer JD.Com Inc(ADR) JD, Nowak said. 

Walmart has been earmarking India as a focus area over the last one to two years, he said. 

A partnership with Flipkart could mean Walmart is going on the offense in establishing itself in India, the analyst said. 

The Price Action

Amazon shares have added over 60 percent over the past year, while Walmart is up a more modest 18 percent.

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