Extended-form Case Study

Walmart: stock valuation and real options with Jet.com

Published on July 31, 2022   9 min

A selection of talks on Finance, Accounting & Economics

Hello. I'm Professor Mike MacDonald. I'm a professor of finance at Fairfield University in Fairfield, Connecticut. Today, I'd like to talk to you about the concept of real options and how it can impact stock valuation. Specifically, we'll look at this topic through the lens of Walmart's buyout of Jet.com.
Now, you might be familiar with the concept of options. We think about options in an investment context as it relates to puts and calls and things like that. All real options are related to this idea. The basic concept with an option is that it gives the holder the ability to decide whether or not to take an action in the future, in exchange for a small upfront cost today. Options, as I said, are typically associated with stocks, but corporations also use this concept through what we call 'real options'. A real option is a choice made available to managers of a company concerning business investment opportunities. We refer to it as 'real' because it typically references projects involving a tangible asset instead of a financial instrument. That's the basic idea.
Let's set the stage. Now, you might be familiar with Walmart. They're the world's largest retailer by dollar volume of sales. Today, Walmart has a very robust online e-commerce business. But if we rewind the clock, they did not have this strength, even as recently as 2015. Instead, the firm had a slow-growing stable offline and brick-and-mortar presence, but it was actually losing very badly in e-commerce to Amazon.

Walmart: stock valuation and real options with Jet.com

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