Is Walmart Stock Overvalued?

Is Walmart Stock Overvalued? Before there was Walmart, there was Walton’s 5 &10 – a mom-and-pop store in Bentonville, Arkansas. Sam Walton opened his small town shop with the goal of building a business that offered quality products at fair prices and exceptional customer service. 

The dime store was a success, and soon Walton saw he could go bigger. That led to the launch of Walmart in 1962. In 1970, Walmart went public, and by 1990, the company led its peers as the largest retailer in the United States.

It decided to explore opportunities on an international scale, and by 1999, Walmart was the largest employer in the world. For a brief period, it even held the title of wealthiest company in the world, though that was somewhat short-lived. 

The question now is whether it’s still a buy or on the cusp of a downturn?

Walmart Got Amazon’ed But…

For years, Walmart was at the very top of the global retail industry, holding first place as the world’s biggest retailer. It wasn’t until 2019 that Amazon finally pushed Walmart into second place. Still Walmart remains one of the world’s largest employers, with more than 2.2 million workers. 

Walmart’s exponential growth is generally credited to a three-pronged strategy that includes the following components: 

• Consumer-centric marketing
• Reducing cost-of-goods sold and passing some of the savings along to customers 
• Locating warehouses in close proximity to stores to reduce costs associated with distribution 

As a result of this approach, Walmart now has 11,500 stores and a presence in 27 nations – not to mention revenue of $524 billion for fiscal 2020.

All of this growth has created a corresponding increase in stock value, and as of mid-October, Walmart stock traded around $144 per share. 

Investors know Walmart has the right business model to meet consumer expectations, and it appears likely that the growth trend will continue into the foreseeable future. However, that doesn’t necessarily mean that Walmart stock is a smart buy at current prices. The big question for investors boils down to this: Is Walmart stock overvalued?

Why Walmart Stock Went Up?

Walmart stock saw a dip during the March 2020 market crash, but there is no dispute that it recovered quickly and completely.

Not only did it get back to pre-crash levels (nearly $120 per share) within a matter of weeks – it rapidly surpassed those prices to reach new all-time highs. 

At the most basic level, Walmart was able to thrive during the pandemic, because it had the right products in the right places at the right time. The company carries essential items, such as groceries, cleaning supplies, and medicine, as well as a mix of discretionary goods.

Perhaps more importantly, Walmart offers cash-strapped consumers lower-than-average prices on necessities. With an abrupt rise in unemployment, that was an important element of Walmart’s overall success during the second quarter.

More recently, Walmart stock went up because it rolled out its Walmart+ program. Customers pay a monthly or annual fee that grants them access to special members-only advantages.

Among other benefits, Walmart+ members get free delivery of their purchases – including groceries. That piece gives Walmart a fighting chance to beat back Amazon’s endless advances. 

Walmart’s strong results during 2020’s most volatile periods and its brilliant new move to compete with Amazon have driven share prices up considerably.

Investors are enthusiastic about Walmart’s prospects in coming months and years, and the general sentiment is that the company simply can’t lose. Are investors right about Walmart’s future, or are shares too costly at their current price? In other words, will WMT share price fall?

Walmart Financials Remain Impressive

Walmart’s August 18, 2020, release of second quarter results was a bright spot in an otherwise dismal earnings landscape.

The company was one of a very small number that had good news to report, as demand for products in a variety of categories increased significantly as the pandemic wore on. 

Total revenue came in at $137.7 billion, which represents a 5.6 percent/$7.4 billion increase year over year.

If currency is not considered, the increase in total revenue would be 7.5 percent or $140.2 billion. One of the most remarkable figures was 97 percent growth in eCommerce sales for Walmart’s US division and a 39 percent increase in ecommerce sales for the Sam’s Club division.

True, international sales did go down by $2.4 billion to $27.2 billion, which is a decrease of 6.8 percent. However, management appeared relatively unconcerned by this component of the company’s overall financial state. 

Walmart reported that it has been able to increase its gross profit by focusing on sales of high-margin items. It is reducing reliance on price markdowns to attract customers, which has contributed to stronger profits.

Perhaps more importantly, Walmart benefited enormously from the distribution of economic stimulus checks. Many recipients of these funds chose to stretch their dollars farther by making their purchases at Walmart, which offered a nice boost to top line results. 

Finally, Walmart made an announcement that was particularly impactful given the rash of dividend decreases across the market. The company stated it will increase dividends for its shareholders in the third quarter, marking 47 consecutive years of growing income for investors. 

Walmart’s next earnings report is expected on November 17th, 2020, and investors are anxiously awaiting an update. Has Walmart carried its second quarter success through to another quarter? 

Is Walmart Valuation Too High?

After second quarter earnings were announced, share prices dropped a bit, which surprised some investors. After all, the report was nearly all positive, and the company made it quite clear that it was pandemic-proof.

The drop appeared to be based on concerns that Walmart’s valuation was too high, and certain shareholders were concerned that the company would be unable to maintain its momentum through the second half of the year. However, those concerns appear unfounded. 

First, the pandemic-related boost in sales likely carried through the third quarter – we’ll know for sure in mid-November. While stay-at-home and quarantine orders have relaxed somewhat, the situation is far from business as usual.

Second, concerns about an unreasonably high valuation did not consider the introduction of Walmart+. This membership program is taking Walmart into entirely new territory that promises to push sales higher in coming months. 

As of late October, Walmart’s price-to-earnings ratio is a reasonable 23.15. While it might be a bit costly from some perspectives, most investors and analysts agree that this price accurately reflects the company’s growth prospects. 

Will Walmart Stock Drop?

Every stock has its ups and downs, and Walmart is no different. Though it is on a strong upward trajectory, there are no guarantees that share prices will remain steady if there is additional political or pandemic-related turmoil.

The real question isn’t “will Walmart stock drop”, but instead, “when Walmart stock drops, will it stay down?”

It appears that it will not. With the information available right now, the consensus is that Walmart stock will ultimately  increase in value, though there may be a few dips along the way.

Is Walmart Stock Overvalued? The Bottom Line

The bottom line is that while Walmart stock is reaching new heights, it does not appear to be overvalued. The company has a long history of rapid growth, and that growth is expected to continue, both short-term and long-term. 

To some extent, Walmart’s share price accounts for the growth that is predicted in coming months, though many believe current prices don’t reflect the company’s full potential. If you share that perspective, Walmart is a smart buy at today’s prices, as the per-share cost is more likely to increase than decrease. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.