Even as Walmart (WMT) shares trade near all-time highs, Morgan Stanley is bullish on the opportunities the retail giant has ahead.
After Vox’s Recode reported in February on the big box retailer’s plans to roll out its membership service dubbed Walmart+, the stock closed about 3% lower. But as we learn more about the looming launch, Morgan Stanley analyst Simeon Gutman pointed out to Yahoo Finance Monday that the stock enjoyed a 10% rally last week, seemingly exemplifying how quickly investors have shifted to assign a premium to anything e-commerce related in the COVID-19 environment.
As Gutman highlights, “companies with subscription models like [Amazon, Costco, Netflix, and Spotify] trade at higher multiples than [Walmart,] thus Walmart+ opens the door to a higher multiple.”
As a retailer with an already robust e-commerce business, Walmart’s strong standing to launch a possible Prime substitute is not novel, but Gutman estimated some of the latest rally might be tied to retail investors jumping on the heightened thesis of Walmart taking on Amazon more directly.
“But obviously it matters what happens with returns and growth over time that will ultimately dictate it but the stock seems to have been taken up by a balloon here on this news,” Gutman told Yahoo Finance.
Notably, Walmart has yet to acknowledge or comment on Recode’s report of a looming release of its membership said to cost $98 a year. That has left many wondering what might be included in Walmart+, but Gutman estimates it already has a large jumping off point with Walmart’s Delivery Unlimited, which allows for unlimited grocery in the 1,850 stores that support it.
Beyond that, Gutman speculated a new push into health care services could be roped into the membership to differentiate it from what Amazon Prime offers. Last week, the retailer announced it was recruiting in the Dallas area for a new insurance arm dubbed Walmart Insurance Services to sell Medicare insurance. Noting Walmart also operates four health clinics, Gutman hypothesized those operations could be quickly expanded to leverage the chain’s retail footprint.
“I don’t think you can really replicate health care yet online and therefore having some physical destination to help the customer with affordable type services that also are connected to the retail experience, that would be the silver bullet,” he said.
In the latest note, Morgan Stanley reiterated its Overweight rating and held its price target at $140 a share. That could soon change depending on when and what Walmart unveils with an official launch.
“We’ve said previously that the concept of a membership program is in the stock’s premium valuation,” Gutman said, adding that it could change depending on “the extent we discover more (or less) value from the program.”