After Earnings, Is Walmart Stock a Buy, a Sell, or Fairly Valued?

Walmart WMT released its fourth-quarter earnings report on Feb. 20. Here’s Morningstar’s take on Walmart’s earnings and outlook for the stock.

Key Morningstar Metrics for Walmart

• Fair Value Estimate: $50.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Walmart’s Q4 Earnings

Walmart posted strong fiscal fourth-quarter results that exceeded our expectations. The company’s $1.80 adjusted earnings per share outpaced our forecast by about 8%, though management’s fiscal 2025 guidance came in a bit softer than we anticipated.

The company delivered another quarter of strong top-line growth, with comparable sales in the US expanding 4% (5.6% for the full year), driven by transaction gains as its low-price value proposition continued to attract consumers. We were also impressed by Sam’s Club’s resilient top line, as comparable sales expanded 3% during the quarter (due to transaction growth) and 4.8% for the full year.

We believe Walmart’s vast scale lets the company offer attractive prices across a range of product categories, such as grocery, health/wellness, and general merchandise. We think its low prices resonate with consumers during periods of economic uncertainty as they grow increasingly value-conscious, which was apparent from the 4.3% increase in transactions at Walmart US during the quarter.

Walmart currently trades in 2-star territory. We expect the firm to continue delivering modest top-line growth and slight margin expansion in coming years, as its investments in digital capabilities and automation gradually scale. However, we do not forecast pronounced margin expansion in the near term.

Fair Value Estimate for Walmart

With its 2-star rating, we believe Walmart’s stock is overvalued compared with our long-term fair value estimate, which we have raised to $50 per share from $49 following its most recent earnings report and 3-for-1 stock split, primarily due to the time value of money. The company’s results modestly exceeded our expectations, and we are impressed by the consistent comparable sales growth and transaction volume gains that both Walmart US and Sam’s Club delivered throughout the fiscal year. Our fair value estimate implies a forward fiscal 2025 price/earnings multiple of about 21 times and enterprise value to EBITDA multiple of about 10.5 times.

We expect fiscal year 2025 to remain choppy as economic uncertainty and inflation pinch wallets. Nonetheless, we believe Walmart’s low-price value proposition tends to resonate with consumers during uncertain economic periods, driving share gains in its grocery category. As a result, we expect the company to deliver modest growth in transaction volume and low-single-digit price growth due to inflation. However, we expect operating margins to remain pressured as Walmart’s domestic sales mix leans toward the lower-margin grocery category.

Over a longer-term horizon, we expect Walmart US (about 70% of total sales) to deliver low-single-digit top-line growth. We note that Walmart has reached its effective peak in physical store count, and we expect it to instead deliver the bulk of its growth through increases in comparable store sales. Our estimate of 2.5%-3.0% comparable store sales growth is underpinned by modest growth in both volume and price, and it slightly exceeds the 2.0%-2.5% organic growth rate Walmart US posted over the past two decades.

We believe Walmart is making the requisite investments to continue attracting consumers and driving loyalty. We expect e-commerce penetration to approach 18% of domestic sales by the end of our explicit forecast, but we don’t view the firm’s omnichannel investments as a catalyst for pronounced organic growth. Rather, we think these investments are an opportunity for Walmart to solidify its existing customer base and take incremental share from smaller brick-and-mortar retailers that fail to adapt to consumer trends.

Read more about Walmart’s fair value estimate.

Walmart Historical Price/Fair Value Ratio

Ratios over 1.00 indicate when the stock is overvalued, while ratios below 1.00 mean the stock is undervalued

Economic Moat Rating

We believe Walmart has a wide moat, underpinned by its cost advantage and a ubiquitous brand associated with low prices in its domestic market. The company is the largest retailer in the United States, with over $440 billion in annual sales and a massive store footprint of over 4,600 domestic namesake locations. Despite the fragmented and competitive landscape of retail, we surmise that Walmart has carved out an enviable position, benefiting from its proximity to the vast majority of US consumers.

We view Walmart’s seemingly unwieldy physical footprint as a strategic asset due to its entrenchment in US communities, which lets it serve customers through multiple channels. Furthermore, the firm leverages its unmatched scale by spreading its omnichannel and distribution investments over a wider sales and profit base, letting it adapt to the dynamic retail environment while maintaining robust profitability.

While the retail industry is cutthroat due to the virtual nonexistence of switching costs, Walmart has built a resonating brand in the US over the past five decades. In our view, its moat is predicated on the reinforcing flywheel between strong brand recognition that drives consumer foot traffic and unit sales and leverage over suppliers and a vast supply chain network to drive down costs. Consumers are attracted to Walmart due to its unique promise of a wide assortment of goods at low prices (we estimate its stores hold around 140,000 stock-keeping units compared with Target’s TGT 80,000 and Dollar General’s DG 10,000), which drives high transaction volumes and unit sales. Walmart can leverage its robust unit sales and retail presence to negotiate lower prices with suppliers. Consumers recognize its ability to stock shelves with low-priced goods, reinforcing traffic.

Read more about Walmart’s economic moat.

Risk and Uncertainty

We assign Walmart a Medium Uncertainty Rating. The rise in e-commerce is the most formidable threat to the firm’s traditional brick-and-mortar retail model. While its sales are underpinned by grocery items (60% of domestic sales), which tend to be more insulated from online penetration, we surmise Walmart faces tough online competition for sales of general merchandise such as electronics, apparel, and home decor, which is unlikely to abate anytime soon.

Given the higher margins that merchandise sales typically carry over grocery, margin pressure could ensue over time if that business becomes a larger part of Walmart’s mix. Furthermore, Amazon.com AMZN has entertained expanding its physical presence in grocery beyond Whole Foods and Amazon Fresh. While we view this threat as low due to Amazon’s lack of physical storefronts, it is worth monitoring competition from the corporate behemoth.

Read more about Walmart’s risk and uncertainty.

WMT Bulls Say

• Margin pressure should abate as Walmart’s recent investments in omnichannel fulfillment and its third-party marketplace continue to scale.
• Walmart’s vast grocery offering insulates the firm from digital competition, given the perishability of the merchandise.
• Walmart’s recent investments in supply chain automation should drive margin expansion. The firm may also reinvest the cost savings to hold down prices and drive foot traffic to its stores—a benefit relative to many smaller retailers.

WMT Bears Say

• Walmart’s third-party marketplace and third-party fulfillment capacity pale relative to Amazon’s scale. We posit that Amazon can underprice Walmart on commissions, listing fees, and fulfillment services related to its marketplace.
• Sam’s Club has woefully underperformed Costco in recent years, and the brand does not provide a compelling value proposition that would allow Sam’s to take share.
• Walmart’s sales mix of higher-margin general merchandise categories stands to decline due to strong digital penetration, prompting long-term margin degradation.

This article was compiled by Freeman Brou.