Walmart (WMT) impressed investors and analysts alike with its Q3 results, showing improvements across the board. More importantly, management raised their guidance, signaling confidence in a strong holiday season ahead. These developments sustained the stock’s prolonged rally, with shares now up 76% over the past year. However, this euphoria has stretched Walmart’s valuation to quite expensive levels, which I view as a potential risk to investors’ total return prospects. For this reason, I am neutral on the stock.
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Q3 Highlights: Growth and Key Drivers
Let me start by saying that Walmart’s ongoing rally isn’t without justification. The company is thriving, as it posted decent revenue growth of 5.5% in Q3 and operating income growth of 8.2%. Several factors boosted these results, such as impressive 27% gains in eCommerce. Walmart’s advertising business was also a star performer, growing by 28%, fueled by Walmart Connect domestically and by Flipkart internationally. Management highlighted that their initiatives, like expanding marketplace sellers and investments in digital infrastructure, played a crucial role in boosting these segments.
In addition, both the company’s physical and digital channels demonstrated strength, with Walmart’s U.S. comparable sales rising 5.3%. Growth in transaction counts and unit volumes, especially among higher-income households, was also noteworthy, with Walmart continuing to capture more of the grocery and general merchandise spending from consumers earning over $100,000. Meanwhile, in-store shopping, store pickup, and home delivery all showed robust gains. These efforts translated into improved gross margins due to higher membership income and lower eCommerce losses.
Lastly, on the international front, Walmart had an equally successful quarter, with net sales climbing 8% (or 12.4% in constant currency). Key drivers included Flipkart in India, Walmex in Mexico, and a robust performance in China. Interestingly, Walmart’s advertising business saw a 50% jump in international markets, which I believe reflects a broader trend of increased advertiser counts and better inventory management. This led to reduced markdowns and improved operating income.
FY2025 Outlook: Momentum Builds for a High-Stakes Holiday Season
Looking ahead, Walmart appears set for sustained strength, as reflected in management’s raised guidance for FY2025. The company expects net sales to grow by 4.8% to 5.1%, up from the previously anticipated 3.75% to 4.75%. Also, adjusted operating income growth is projected at 8.5% to 9.25%, an increase from the previous range of 6.5% to 8%.
These optimistic revisions come as management remains confident in driving value through competitive pricing and convenience—a strategy they successfully demonstrated in Q3.
Valuation Concerns: The Risk After a Prolonged Rally
Despite Walmart’s continued momentum and encouraging outlook, I believe that the stock’s recent surge raises valuation concerns. Even with management’s boosted guidance, consensus EPS estimates point to $2.48, representing a solid growth of 11.7%. However, this means that shares are now trading at around 35.7 times this year’s expected earnings—a rather steep multiple for a retailer. While not as pricey, this reminds me of the high valuation multiples seen in Costco stock, which has also faced investor skepticism.
Regardless, Walmart’s stretched valuation could represent a key risk for current and future investors. The company is certainly executing well on multiple fronts and delivering value to consumers through various initiatives. However, this doesn’t take away the risk of potential valuation compression.
Should the current market enthusiasm moderate or macroeconomic headwinds start affecting retail sentiment, a pullback is likely to substantially limit future returns for new investors at these levels. Therefore, I believe the present valuation makes it difficult to see a compelling entry point without the risk of a significant correction.
Is WMT Stock a Buy?
Surprisingly, Wall Street analysts remain quite bullish on Walmart’s outlook despite the stock’s prolonged rally. In particular, WMT stock features a Strong Buy, with recent analyst ratings consisting of 26 Buys and just one Sell rating over the past three months. At $93.18, the average WMT stock forecast implies 3% upside potential.
For the best guidance on buying and selling WMT stock, look to Robert Ohmes. He is the most accurate analyst covering the stock (on a one-year timeframe), boasting an average return of 22.4% per rating and an outstanding 95% success rate.
Final Thoughts
Summing up, Walmart’s Q3 results were undeniably impressive, showcasing strong growth across key areas like eCommerce and international markets. In addition, management’s upbeat guidance signals confidence heading into the holiday season, which should excite investors. And yet, with shares already up 76% over the past year, I can’t help but think Walmart’s valuation may now be quite steep.
While the company is executing well and is positioned for further top and bottom-line gains, today’s price leaves little to no room for error. Accordingly, I think staying cautious makes sense until a more attractive entry point emerges.
