Walmart's stock was once a market darling. Now its tech-fueled valuation faces a reality check.

By Bill Peters

Walmart shares have lagged peers and the S&P 500 this year, with some analysts noting that business is still dominated by low-margin grocery sales

Walmart shares have trailed those of Costco, Amazon.com, Target - and the S&P 500 index so far this year.

Walmart has been a killer stock for the better part of this decade, but it's now struggling to keep pace with its biggest rivals and the overall market.

Several factors help explain the recent underperformance of Walmart shares (WMT), which have corrected 12.3% from its May 19 record close to leave it up less than 6% so far this year, lagging behind rival stocks like Costco (COST), Target (TGT) and Amazon.com (AMZN). Walmart has had success drawing inflation-fatigued shoppers and embracing e-commerce, but analysts say past gains are colliding with consumer stresses, potentially unrealistic expectations around the company's tech forays and efforts to keep prices low at the expense of margins.

Analysts are still upbeat on Walmart's prospects overall, but say the stock has been priced to perfection since last year. And when Walmart's first-quarter earnings last month came out slightly less than perfect, some investors fled, a big factor behind this year's sluggish stock performance.

One issue with that report, according to Zacks Director of Research Sheraz Mian, is that Walmart opted to eat some of the extra costs related to fuel, tariffs and other supply disruptions, rather than pass all of it on to consumers in the form of price increases.

Some analysts have found other issues. Despite Walmart dominating the retail universe, its operating margins have yet to rebound to levels seen more than a decade ago, before Amazon became a fiercer competitive threat. And they suggested some of Walmart's bigger tech investments - things like AI, online shopping and advertising - masked the fact that, at its core, Walmart is essentially a very large grocery store with some ancillary businesses.

Walmart may have a stock valuation in the neighborhood of a big tech company. But Morningstar analyst Brett Husslein said that, unlike Amazon, it doesn't have a massive cloud-computing business to prop up margins.

"They are primarily a low-margin grocery retailer, and we think the market is pricing in them exceeding all-time highs in profitability," he said.

While grocery sales drive most of Walmart's business, the margins on food and beverages are lower than those of other items in the store that don't have expiration dates. Husslein said the company needs to generate more business from those higher-margin nongrocery items - in particular, general-merchandise products such as electronics, clothes and housewares - to boost margins and the stock.

The stock closed up 0.7% on Thursday, the day investors gathered for Walmart's annual shareholder meeting, but the 5.6% year-to-date gain trailed those of other retail giants.

Target's stock has gained 26.7% so far this year, helped by low expectations and a rebound driven by new leadership. Costco Wholesale shares are up 12.8% over that period, as concerns about slipping membership renewal rates start to fade.

Shares of online retail giant Amazon, meanwhile, are up 10% this year. The S&P 500 index SPX is up 10.8% so far this year.

Meanwhile, Walmart's price-to-earnings ratio, based on earnings estimates for the next 12 months - a metric that can be used to gauge whether a stock is overvalued - ended Thursday at 38.8, according to FactSet data. The forward P/E ratio for the S&P 500 was 21.3.

Over this year, Walmart's market valuation has occasionally cracked the $1 trillion barrier, but the company has struggled to stay there. It had a market capitalization of about $940 billion on Thursday.

Husslein noted earlier this year that Walmart's operating margins would need to be closer to its historic highs - or more than 6% - to justify its lofty valuation. That's a level not seen in more than a decade. In the first quarter, Walmart's operating margin stood at 4.2%, according to FactSet.

Husslein forecasts margins expanding to 5.6% by the end of the decade. He said that Walmart's U.S. general merchandise business commanded a 13.8% share of the market in fiscal 2011. In fiscal 2026, that market share stood at 11.1% due to heightened competition.

Demand for more discretionary goods has also suffered over the past four years, with higher prices steering more shoppers toward basics like groceries.

As the Iran war keeps average U.S. gas prices above $4 a gallon, Walmart executives said during the chain's earnings call last month that people weren't putting as much gas in their tanks - a sign of deeper consumer anxiety. They also said prices of items in stores could keep climbing if fuel costs stay elevated.

D.A. Davidson analyst Michael Baker said that Walmart, to some degree, has been a victim of its own success.

"It's been a very good stock over the last few years," easily beating out Costco and the S&P 500 over the past two calendar years, he said.

"The valuation has increased and is trading at a premium," he added. "So it's just harder for the stock to work as well as it has the last few years."

-Bill Peters

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06-05-26 0644ET