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SUMMARY
Parkev Tatevosian, CFA, provides an in-depth analysis of Walmart's recent performance, emphasizing its progress in e-commerce and operational improvements. Despite these advancements, he concludes that the current valuation remains too high to recommend the stock as a buy.
MAIN POINTS
- Walmart's stock performance has been volatile and relatively flat compared to the S&P 500, offering lower risk but less return.
- Walmart has significantly improved its e-commerce operations, narrowing the gap with Amazon, but at the cost of declining operating profit margins.
- Operating margins have decreased over the years, but returns on invested capital have rebounded, now exceeding the company's cost of capital.
- Walmart's business remains highly capital-intensive due to its vast physical and digital infrastructure, which it has managed effectively.
- The company's valuation remains high, with a forward price-to-earnings ratio above 30, making it less attractive compared to peers like Amazon.
- Despite Walmart's strengths, the analyst believes the stock is overpriced and would only consider buying after a significant price drop or further business improvement.
DETAILED ANALYSIS
Walmart has demonstrated notable progress in closing the operational gap with Amazon, particularly through substantial investments in e-commerce. These efforts have helped the company achieve trailing twelve-month revenues of $725 billion, underscoring its scale and reach. However, the transition to a more digitally integrated business model has come at the expense of operating profit margins, which have declined from approximately 4.75% in 2017 to 4.16% in the latest period.
Historically, Walmart has operated on thin margins, a fact highlighted by former CEO Sam Walton's rare celebration of a 6% operating margin.
Despite the margin pressure, Walmart's return on invested capital has improved significantly since bottoming out in 2019, now reaching 13.8%. This figure surpasses the company's weighted average cost of capital, indicating that recent investments are generating shareholder value. The company’s capital intensity remains high, with over 10,000 physical locations worldwide and a growing digital logistics network.
Successfully managing such a vast infrastructure is a testament to Walmart's operational expertise and competitive advantage, especially as a low-cost provider in a challenging industry.
Valuation, however, remains a sticking point. At the start of 2026, Walmart's forward price-to-earnings ratio exceeded 40, higher than Amazon's, despite Walmart’s slower revenue growth and lower profitability. Although the ratio has since moderated to 34, it is still considered elevated for a business with modest growth prospects and low margins.
Discounted cash flow analysis also suggests the stock is trading well above its intrinsic value, with a market price of $112 per share compared to an estimated fair value of $55. While Walmart's business fundamentals are strong, the current valuation does not present an attractive entry point. A significant price correction or further operational improvement would be necessary before the stock becomes a compelling buy.
LINKS
- YouTube channel membership for exclusive perks and spreadsheets.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on a six-step investing framework.
- Fiscal.ai investment research platform with a discount for viewers.
- Webull investment platform sign-up with bonus shares.
- Subscribe to Parkev Tatevosian's free monthly Substack newsletter.