TLDR
WMT stock opened at $102.63 on Friday, down from a 52-week high of $135.15, after losing roughly one-fifth of its value since May highs. Q2 comparable U.S. sales came in at 2.6%, missing the 3.8% estimate, sending the stock down 9.2% in a single day. Walmart’s advertising business grew 38% year-over-year, with Walmart Connect up 43%, and advertising plus membership fees now account for about one-third of operating income. Despite the selloff, 29 of 32 analysts rate WMT a Buy, with an average price target of $129.57, implying around 26% upside. WMT still trades at roughly 36x forward earnings, well above the industry average of 15x, but below the 46x it commanded before Q1 earnings.
Walmart (WMT) stock has had a rough few months. After hitting a 52-week high of $135.15 and briefly crossing the $1 trillion market cap mark, the stock has been cut down hard. It opened at $102.63 on Friday, putting its market cap at around $816 billion. Micron Technology, Inc., MU
Two earnings reports did the damage.
Q1 in May showed strong revenue, up 7.3% year-over-year, but EPS guidance missed expectations. The stock dropped about 7% that day. Then Q2 results landed on August 20, and the reaction was worse. U.S.
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comparable sales came in at 2.6%, well short of the 3.8% analysts had penciled in. Q3 EPS guidance of $0.62 to $0.64 also fell below the $0.68 consensus. WMT dropped 9.2% in a single session, wiping out more than $80 billion in market cap.
The headline comp number, though, deserves some context. Regulatory changes to drug pricing created a drag on the health and wellness category. Strip that out, and comps were closer to 3.4%. Still a miss, but not the freefall the headline implied. Q2 EPS came in at $0.81, beating the $0.74 consensus estimate.
Revenue hit $187.94 billion, above the $186.64 billion expected, up 5.9% year-over-year. Return on equity was 21.83%. Digital Business Keeps Growing
While the comparable sales number grabbed the headlines, Walmart’s digital operations told a different story.
Global e-commerce grew 23% year-over-year. U.S.
e-commerce was up 24%. Marketplace sales jumped 52%, membership fee revenue rose 17%, and store-fulfilled delivery grew 43%.
Advertising was the standout. Total advertising revenue grew 38%, with Walmart Connect up 43%. Analysts estimate gross margins on the advertising business are close to 70%. Advertising and membership fees combined now account for roughly one-third of Walmart’s operating income, despite being a fraction of total revenue. The model behind Walmart Connect is straightforward.
Brands pay to have their products surface when shoppers search on Walmart’s platform. A single customer can generate both retail revenue at checkout and advertising revenue from the brand that paid to reach them. Valuation Still Stretched, But Less So
WMT is not cheap.
At around 36x forward earnings, it trades well above the sector average of 15x and above its own five-year average of around 30x. Before Q1, the multiple was 46x. Before Q2, it was 38x.
Two rounds of multiple compression have taken some of the pressure off. Wall Street has not turned its back on the stock. Of 32 analysts covering WMT, 29 rate it a Buy.
The average price target sits at $129.57, implying around 26% upside from current levels. Jefferies reaffirmed a Buy with a $120 target. Guggenheim and Mizuho both set $130 targets. On the insider front, EVP Daniel Danker sold 50,644 shares on August 26 at an average of $105.35, a move made under a pre-arranged 10b5-1 plan to cover tax obligations related to vesting equity awards. Stop guessing and start investing with confidence.
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