Walmart (NYSE:WMT) needs no introduction; the company is the largest retailer in the world by revenue. But Walmart’s size makes it difficult to grow. With the rise of e-commerce and membership-only retailers, Walmart’s store count has decreased by 1,000 locations since 2018. Over the past 10 years, the company’s earnings per share grew at an annualized rate of just 3.5%. This begs the question: why is Walmart the most expensive it’s been in 20 years? Walmart’s stock price could get cut in half due to its high valuation. Thus, I’m bearish on WMT.
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Walmart’s Q1 Earnings Release – Not What It Seems
In Walmart’s Q1 earnings release, the company reported net income of $5.10 billion, up from $1.67 billion in Q1 of the prior fiscal year. While this initially looked very impressive and caused the stock to surge, it’s not what it seems. Let me explain.
Walmart has been losing a lot of money in recent years on its equity investments. The company seems to have bought into a lot of growth stories over the years, such as Chinese e-commerce retailer JD.com (NASDAQ:JD), India e-commerce player Flipkart, and recently, automation company Symbotic (NASDAQ:SYM). I don’t particularly like this venture capital investment approach; it has lost a ton of money for Walmart in recent years.
The company measures these investments at fair value and holds them in the “other long-term assets” portion of its balance sheet. When the value of these stakes rises or falls, Walmart records that as income or losses in the “other gains and losses” section of its income statement. For example, if Symbotic’s stock price increases in any given quarter, Walmart will record that as income. This is why Walmart’s income surged by such a large amount compared to last year’s Q1.
In Walmart’s latest annual report, the company reported that its equity investments “resulted in net losses of $3.8 billion, $1.7 billion and $2.4 billion for Fiscal 2024, 2023 and 2022, respectively, primarily due to net changes in the underlying stock prices.” But miraculously, in Q1 2025, Walmart reported a gain on its investments of $794 million compared to a $2,995 million loss the year before. If we eliminate these gains and losses, then the company’s pre-tax income increased by just 9.8% vs. Q1 2024 rather than 162%.
Below, you can see how its investments affect its income statement.
Wall Street likes to get excited about quarterly earnings beats and similar events, but I prefer to look at average earnings over at least a few years. As we saw above, accounting quirks like this can affect earnings in the short term.
Competition Has Been a Problem
Walmart grew at a rapid pace for decades, crushing the likes of Kmart, Sears, and mom-and-pop department stores along the way. But in recent years, Walmart has struggled to grow.
With a shrinking store count, the company has been trying to improve its e-commerce offerings and recently reported that its “e-commerce losses continue to narrow.” The problem I see is that if you’re making losses on a business that’s been years in the making, you probably don’t have a competitive advantage. E-commerce has done a better job supporting revenues at Walmart than bolstering profitability. Overall, I think e-commerce has been a net negative for retailers because home delivery is so expensive.
While Walmart still has a value proposition as an affordable one-stop shop, its competitors usually have a niche that they’re better at than Walmart. For example, Amazon (NASDAQ:AMZN) is better at e-commerce, Costco (NASDAQ:COST) is better at specialty products and membership retail, dollar stores are often cheaper, Whole Foods and Sprouts Farmers Market (NASDAQ:SFM) are better at health-conscious grocery.
Walmart’s once-stable profit margins have been volatile in recent years, possibly as a result of increased competition. While Walmart’s operating margin stayed steady for years at around 5.5% to 6%, it began to plummet in 2014 and has stayed down in the 4% to 4.5% range. Sustained margin contractions like this often signal that a company has lost its competitive advantage.
With the recent unrealized gains, Walmart’s net margin of 2.88% is closer to its long-term average and above its 10-year average. So, I don’t see any long-term margin expansion upside. An eventual increase in the corporate tax rate could actually result in more downside.
The Valuation Is at Its Highest Mark in Two Decades
Switching over to Walmart’s valuation, the company hasn’t been this expensive in nearly 20 years. Since net income can be volatile, I’ll also highlight less volatile valuation metrics of price-to-book, price-to-sales, and EV-to-EBIT, which stand at 6.4x, 0.8x, and 21.1x, respectively. While Walmart’s valuation briefly approached these levels in 2020, the last time the company’s valuation stayed sustainably above these levels was prior to 2004.
Regarding its P/E, Walmart traded at an average P/E ratio of around 14x from 2009 to 2017. I believe Walmart’s P/E ratio could fall back into the 14x range in the years ahead, which would be a more appropriate multiple for a company that’s still facing competitive threats and has seen its 10-year compound annual growth rate slow to 3.5% despite rampant food inflation in recent years.
Is WMT Stock a Buy, According to Analysts?
Currently, 24 out of 27 analysts covering WMT give it a Buy rating, resulting in a Strong Buy consensus rating. The average Walmart stock price target is $70.44, implying upside potential of 9.75%. Analyst price targets range from a low of $59.00 per share to a high of $75.99 per share.
The Bottom Line on WMT Stock
Considering Walmart’s shrinking margins (which indicate a dwindling competitive advantage), consecutive losses on equity investments over the past three years, and lackluster growth, I believe Walmart’s P/E ratio of 28x is overstretched and due for a correction. WMT stock traded at a more reasonable P/E ratio of 14x from 2009 to 2017. If this were to happen again, the stock price could fall by 50%.
