Walmart: Margin Expansion And Digitalization Support Long-Term Returns

Summary:

• Walmart’s stock has surged 50% year-to-date, driven by strong revenue growth, expanding margins, and a successful transition beyond brick-and-mortar retail.
• Despite trading at 33x forward earnings, Walmart’s opportunities in advertising, e-commerce, and a growing third-party marketplace, justify its valuation.
• Walmart remains a ‘Buy’, expected to continue outperforming the market.

Walmart (NYSE:WMT) has been on a tear in the past three years, nearly doubling the market returns, driven by accelerating revenue growth, expanding margins, and strong execution across multiple verticals.

With the stock at all-time highs after a 50% surge year-to-date, it’s time to revisit our long-term Walmart thesis and see if there’s still upside left.

Let’s dive in.

Recapping Walmart’s Post-Pandemic Outperformance

For many years, Walmart has been perceived as a mature, saturated, and sleepy retail giant. With low-single-digit revenue growth, little to no footprint expansion, and relatively steady margins, Walmart appealed to low-risk investors, but not to those seeking significant market-beating performance.

Under the hood, though, Walmart has been building the foundation for a new growth phase, led by digitalization, e-commerce, advertising, and a vibrant third-party marketplace.

I wrote about the ‘Old & New Walmart’ in my July article about the company, which I encourage you to check out as background for this update.

Pretty much since the pandemic, but more so since 2023, Walmart’s investments were beginning to show in its results, leading to record profit margins, and growth levels it hadn’t seen for more than a decade.

Shares responded, with 80% total return over the past three years, more than twice the market:

Walmart’s stock performance was driven primarily by earnings growth, but multiple expansions played a crucial part as well, as the stock is now trading at 33 times forward earnings:

I estimate the market rerated Walmart partially because of sector enthusiasm, as reflected by the strong performance of its peers, but much more importantly, because the market is now grasping, there’s a very strong growth phase ahead, led by the ‘New Walmart’.

Let’s go over each of those drivers.

Sector-Wide Enthusiasm Reflected By Record Valuations

The poster child of market enthusiasm over the retail sector (arguably, over-enthusiasm), is, of course, no other than Costco (COST), a company I’m also covering.

This humble company, which operates membership wholesale clubs, transitioned from being an under-the-radar investment to becoming one of the most controversial stocks when it comes to valuation, trading at an astounding 50x+ P/E.

Its rise was followed by that of its peer in BJ’s Wholesale Club (BJ), and recently, Walmart has joined the party as well.

All of them saw their multiples expand by around 50% over the past five years:

Today, on an absolute basis, Walmart is still very far from the elevated multiples of Costco, but it’s still trading at a high 33x multiple considering its expected growth rate of ~10%.

We are talking about resilient businesses, that provide a strong value proposition to their customers, a great shopping experience, and generate the majority of their sales from essential products.

Also, they have an expansive geographic presence, which provides an immense competitive advantage.

However, all of this was true a decade ago as well, when they traded at much lower multiples. So yes, it makes sense that the market is enthusiastic, but I’m reluctant to think PEG ratios higher than 3x are sustainable.

That’s why Walmart will have to continue execution on its new growth drivers, in hopes they will justify its valuation and continue to drive shares higher.

Gaining Market Share In E-Commerce Across Several Verticals

Walmart is no longer a pure brick-and-mortar business. It has been able to leverage its existing advantages to build the second-largest e-commerce platform in the U.S. in terms of market share.

Although it’s still very far behind Amazon, it’s widening the gap from its smaller competitors consistently. Specifically in groceries, Walmart is estimated to hold the largest market share, with nearly 27%, compared to Amazon’s 18.5%.

The number of sellers on Walmart’s marketplace has been increasing rapidly as well, surpassing 150,000 according to the most updated estimate I could find. This is dwarfed compared to Amazon’s nearly 10 million sellers, but still reflects decent growth.

Lastly, in advertising, Walmart is expected to approach $4 billion in ad sales, with advertising growing above 20% across all segments since they were introduced a few years ago.

All in all, it’s hard not to be optimistic about Walmart’s future in the digital landscape. Although it is not yet profitable in e-commerce, management said they are on track, and high-margin ads should help that.

Those new growth pillars, combined with the core business, do justify a higher multiple, but how much higher? That’s the question.

Valuation & Outlook

Walmart is currently trading at 33 times forward earnings and 30 times ’25 estimates.

Those are record highs for a company that’s expected to grow EPS by around 10% annually, on revenue growth of 5%-6%, for the foreseeable future. I view those estimates as reasonable and even beatable, considering all the growth drivers we discussed.

Still, at around a 3x PEG, I find most of the upside already baked in. That said, with such strong execution, strong competitive advantages, and plenty of opportunities, I expect Walmart to maintain its multiple.

Conclusion

Walmart has been a market-beating investment over the past couple of years, driven by market excitement over retail companies, and extraordinary execution by management, building the second-largest e-commerce platform in the U.S.

At current levels, most of the growth prospects and new business pillars are already priced in, but the multiple remains reasonable.

I expect Walmart shares to rise in accordance to EPS growth, which should still provide for a market-beating investment going forward.

Therefore, I reiterate a ‘Buy’ rating.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMZN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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