Walmart’s shares have seen strong returns recently, driven by the company’s effective shift towards a more lucrative, technology-driven retail approach. Their fiscal fourth-quarter report highlighted the success of this strategy.
However, it’s crucial to differentiate between a robust business and an equally strong stock.
While Walmart is undeniably in a strong position, the expectations reflected in its stock price suggest that impeccable performance will be required for the foreseeable future. For potential investors weighing whether to buy, sell, or hold, the key is assessing the disparity between the company’s fundamental performance and its current valuation—which appears significant.
Strong Growth in High-Margin Revenue
The latest earnings report from Walmart reveals why the stock has been a favorite for investors over the past year, with a remarkable 40% increase in value. For the fiscal fourth quarter ending January 31, total revenue rose 5.6% year-over-year to $190.7 billion, with comparable-store sales in the U.S. (excluding fuel) advancing a healthy 4.6%.
U.S. customer transactions also increased by 2.6%, indicating that Walmart is successfully attracting more foot traffic and capturing market share. Importantly, there has been a notable structural change in Walmart’s revenue mix, with digital sales soaring 24% year-over-year, now constituting almost a quarter of the total revenue. A significant factor in this growth was a 50% surge in store-fulfilled expedited delivery.
Cautious Outlook Ahead
Despite the strong results for the fourth quarter, management’s forward-looking statements were more conservative. For fiscal 2027, Walmart anticipates constant-currency net sales growth between 3.5% and 4.5%, a noticeable slow-down from last quarter’s growth rate.
The predicted adjusted earnings per share for the full year is set between $2.75 and $2.85, indicating just a 6% increase year-over-year. Walmart’s CFO, John Rainey, pointed out that this cautious stance aligns with their historical approach to guidance, highlighting the need to be balanced given some troubling macroeconomic indicators.
Valuation Challenges
While Walmart’s performance is commendable, the current market has already priced this in. Currently, shares trade at a price-to-earnings ratio of around 46— a steep valuation for a mature retailer that suggests expectations of ongoing, substantial earnings growth. This price assumes that Walmart can protect its core grocery business while achieving double-digit growth in its advertising and membership revenue streams.
As such, investors face limited safety at this valuation. Should consumer spending decline or obstacles arise in transitioning to higher-margin revenue, there could be a significant drop in stock value, even if the underlying business remains profitable.
So, is Walmart stock a buy, sell, or hold?
Personally, I consider Walmart stock a hold. Current investors have little reason to exit given the company’s impressive cash generation—nearly $15 billion in free cash flow last year—and its dividend payments. However, investing new capital at this elevated valuation seems risky. I would prefer to wait for a potential price drop, which would present an opportunity to purchase shares at a more favorable valuation, better accounting for possible economic challenges.
