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3 Reasons Why Walmart Stock Still Has More Upside

Tom Taulli

It’s been a red-hot summer for Walmart (NYSE:WMT). Yes, in its latest quarterly report, the company showed that it can still post solid numbers. Walmart stock jumped 9% in response and Jim Cramer introduced the WANG stocks (albeit to mixed response).

WMT revenues hit $138.03 billion, compared to the Street consensus of $125.97 billion. The bottom line was also impressive, with earnings per share coming to $1.29. The analysts’ consensus, on the other hand, was looking for $1.22.

Comparable sales growth was also standout. In the quarter, the US growth rate was 4.5% (this was the best in a decade). In fact, it was 5% for Sam’s Club locations.

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But despite all this good news, there’s still a sticking point — that is, Walmart stock is far from cheap. Note that the forward price-to-earnings ratio is 19x. By comparison, Target (NYSE:TGT) is at 15x and Kroger (NYSE:KR) trades at 14x.

So then what now for investors? Is there more opportunity here for the bull case? Well, I think so. Here’s a look at three key drivers for Walmart stock:


Why Walmart Stock Has More Upside: Strong Tailwinds

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The dreaded “retail apocalypse” may be a good development for Walmart stock. How so? Well, the bankruptcies and store closures have reduced the capacity in the market. In other words, it means less competitive pressure for large players like Walmart.

But there is another important factor to keep in mind as well: the strength of the US economy. In the second quarter, GDP growth was 4.1% and the unemployment rate fell to 3.9%. There has also been a pick-up in incomes, bolstered by the tax cuts. The result is that consumers are more confident, which has led to higher spending.

According to Walmart CEO, Doug McMillon, on the earnings call:

“Customers tell us that they feel better about the current health of the U.S. economy as well as their personal finances. They’re more confident about their employment opportunities.”


Why Walmart Stock Has More Upside: Innovation

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Walmart was late to e-commerce, which has definitely been a major problem for the company’s growth. But over the past few years, it has been making up for lost time. Part of this has been from internal investments. But WMT has also turned up the volume on M&A. Some of its deals include the purchases of Jet.com, Shoebuy, Modcloth and Parcel.

As for Walmart.com, there has been a redesign.There is now a 3D-virtual tour for the Home category, and WMT has added 1,100 new brands to the site, such as Shimano, Therm-a-Rest, Lord & Taylor and Steve Madden.

In terms of the growth, the e-commerce business is on the right track. For the full-year, Walmart expects a growth rate of 40%.

The company has also been smart to leverage its brick-and-mortar assets. For example, Walmart has been opening pick-up stations (there are over 1,800 just for for groceries). As Best Buy (NYSE:BBY) has demonstrated, a bricks-and-clicks strategy can be an effective way to fend of Amazon.com (NASDAQ:AMZN).


Why Walmart Stock Has More Upside: India

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Back in May, when Walmart announced the acquisition of 77% of India’s largest e-commerce player, Flipkart, there was quite a bit of skepticism on Wall Street. After all, the valuation was steep. There was also the hit-or-miss history of Walmart’s foreign deal-making.

But despite all this, the Flipkart deal could be a big winner. For the first six months of this year, the sales are estimated to have spiked by 50%, whereas Amazon.com’s India business has increased between 35-40% in the same time frame.

And Flipkart has also been getting traction with its mobile payments business, which is ranked number 2 in the country. There are 100 million users on the platform and 300,000 merchants.

When it comes to India, the growth opportunities are enormous. According to eMarketer, ecommerce spending is projected to jump by 31% to $32.7 billion this year and reach $71.94 billion by 2022 — which is the kind of scale that can even move the needle for a company like Walmart.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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