Back in 2017, everyone was bullish on Walmart (NYSE:WMT). The thesis was simple. After several years of losing share, Walmart finally started fighting back against Amazon (NASDAQ:AMZN) by becoming more Amazon-like and it looked as if Walmart stock would follow.
Walmart got it’s act together on the digital and omni-channel commerce fronts. They reduced prices, expanded product assortment, and increased customer convenience. It worked. Comps improved. Traffic trends stabilized. Digital sales volume exploded higher.
Amid all those positive developments, Walmart stock took off from $65 in early 2017, to $110 by early 2018.
But, at $110 in early 2018, Walmart stock was ahead of itself. As such, despite reporting healthy numbers since then, the stock has largely just bounced around in the $80 to $100 range.
This range-bound trading won’t last much longer. I think the stock is gearing up for take off once again. Why? Because Walmart is still becoming more and more Amazon-like everyday, and upside from all these growth initiatives isn’t priced into WMT today. Indeed, it’s not priced in until about $110 in 2019.
As such, Walmart consistently becoming more Amazon-like creates potential for 10%-plus upside in WMT stock in 2019. That level of share price appreciation, coupled with a 2% yield, gives Walmart stock an attractive return profile here.
Walmart Is Turning into Amazon (Sort Of)
I follow the retail scene closely. Specifically, I follow the Amazon versus Walmart retail competition closely. In watching that competition over the past several quarters and years, I’ve noted a few things. Those observations are as follows:
- Walmart has rapidly expanded its omni-channel commerce operations and capabilities over the past several years, and this expansion has led to Walmart’s digital business consistently outgrowing Amazon’s digital business.
- Walmart has likewise rapidly expanded its grocery business over the past several years, including increasing the availability of grocery pick-up and delivery capability. This omni-channel grocery expansion has been a big driver of Walmart’s strong comps. Meanwhile, Amazon has struggled to grow its grocery business, even with the help of Whole Foods.
- Walmart outbid Amazon for India ecommerce giant Flipkart, which is seen by many as the most important player in the world’s fastest growing e-commerce market.
- Walmart is tapping Microsoft (NASDAQ:MSFT) and its own resources to develop cloud solutions aimed at improving a customer’s digital shopping experience on Walmart.com.
- As Amazon has built out its digital ad business, Walmart is following suit. It recently made a big push to bring digital ads in house.
- Walmart has dabbled in streaming video on demand.
- Much like Amazon has its own hardware line, Walmart is developing a hardware line, too, including a low-priced tablet.
Piecing together all these observations, the big picture is clear here: Walmart continues to become more and more Amazon-like every day. It started with becoming a bigger e-commerce player.
That was just the tip of the iceberg. Now, it includes expanding into grocery, making aggressive international moves, building out a cloud business, developing a digital ad business, and creating branded hardware, among other things.
All these moves make Walmart more Amazon-like, and pave the path for a bright future for world’s largest retailer.
Valuation Implies Good Upside
Right now, Walmart stock trades at over 20-times forward earnings, versus a five year average forward multiple of between 16 and 17. Thus, one could reasonably argue that Walmart stock is already priced for upside through becoming more Amazon-like.
But I don’t think it is.
The key here is that Walmart’s historical forward P/E multiple is based on what Walmart was over the past five years. During a big portion of that stretch, Walmart was an antiquated retailer losing share at a rapid rate to Amazon and other ecommerce players. In those years, the stock traded around 12 to 15 forward earnings.
During the past two years as Walmart has made a huge pivot and started successfully competing with Amazon at scale, the forward multiple has spent most of its time around 20. As such, it’s reasonable to say that now Walmart has proven itself as omni-channel commerce giant that can compete at scale with anyone, the stock’s normal forward multiple is 20. That makes sense.
The entire consumer discretionary sector trades around 20 forward earnings. The new Amazon-like Walmart should trade at that sector average multiple.
From this vantage point, Walmart stock has upside from here. Revenue growth over the next several years should stay around 3%, powered by continued robust e-commerce growth, Flipkart, and digital ads. Margins should start to rebound as Flipkart grows and margins scale, and if/when high-margin digital ad revenue becomes material. Buybacks should remain a big thing. Overall, EPS could reasonably hit $7.50 by fiscal 2025.
Based on a 20 forward multiple, that equates to a fiscal 2024 price target for Walmart stock of $150. Discounted back by 8% per year (below my 10% discount rate to account for the yield), that equates to a fiscal 2020 price target of $110, implying 10%-plus upside over the next twelve months.
Bottom Line on Walmart Stock
Walmart is becoming more and more like Amazon every day, and that’s a good thing. It shows that Walmart has long term staying power as the world’s largest omni-channel commerce retailer. This long term staying power is not fully priced into WMT stock today. As such, upside in 2019 looks good.
As of this writing, Luke Lango was long WMT and AMZN.
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