Walmart Loses Its Biggest Selling Point
In 2017, Walmart Inc. (NYSE: WMT) demonstrated to investors that its business can stand up to online competition from Amazon.com Inc. ( AMZN). Now that online sales growth appears to be slowing, however, analysts are having a tough time finding reasons for investors to buy WMT stock.
On Friday, Oppenheimer analyst Rupesh Parikh downgraded Walmart stock from "outperform" to "perform" and said there's no longer a reason to be excited about the stock.
"We are increasingly concerned that with recent key drivers of outsize e-commerce sales expansion potentially waning and given our now more muted EPS growth expectations, the valuation at which shares trade could prove capped," Parikh says.
[See: The 9 Best ETFs for Retail Power.]
In February, Walmart experienced its single worst day of trading in 30 years when shares dropped more than 10 percent in a day. The sell-off came after Walmart reported that online sales growth dropped from 50 percent in the third quarter to just 23 percent in the fourth quarter.
Walmart expects online sales growth to accelerate to 40 percent in 2018, but Parikh says that target may be "a stretch." If online growth continues to come in soft, he says buyers will likely avoid the stock.
In the meantime, Walmart's heavy investing in its omni-channel initiatives will continue to weigh on margins and limit earnings upside, Parikh says. Oppenheimer lowered its fiscal 2019 EPS estimate for Walmart from $5.15 to $5.23.
Without robust online sales numbers to drive positive investor sentiment, Parikh says Walmart stock is in danger of earnings multiple compression. Walmart stock has historically traded at a price-to-earnings discount to the overall stock market. WMT stock currently trades at a PE ratio of 27.4, a slight premium to the 25 P/E of the Standard & Poor's 500 index.
Even though Walmart stock may take a breather in 2018, after gaining 42.8 percent in 2017, Parikh says there are still plenty of things for long-term investors to like about the stock.
"Despite our now more balanced outlook for WMT shares, we continue to look favorably on a number of key fundamental positives in the story, including a seemingly stronger comp trajectory for U.S. stores, improved underlying financial discipline and an expanding omni-channel presence," he says.
[See: 7 of the Best Stocks to Buy for 2018.]
In addition to the downgrade to "perform," Oppenheimer has lowered its price target for WMT stock from $110 to $93.
Wayne Duggan is a freelance investment strategy reporter with a focus on energy and emerging market stocks. He has a degree in brain and cognitive sciences from the Massachusetts Institute of Technology and specializes in the psychological challenges of investing. He is a senior financial market reporter for Benzinga and has contributed financial market analysis to Motley Fool, Seeking Alpha and InvestorPlace. He is also the author of the book "Beating Wall Street With Common Sense," which focuses on the practical strategies he has used to outperform the stock market. You can follow him on Twitter @DugganSense, check out his latest content at tradingcommonsense.com or email him at wpd@tradingcommonsense.com.
