Source: PaxForex Premium Analytics Portal, Fundamental Insight
Walmart has emerged as the second-best-performing stock in the Dow Jones Industrial Average this year. This performance may seem surprising, especially when compared to the impressive financial results of AI-driven tech giants that have captured attention over the past year.
Despite this, Walmart is strategically navigating its way through appealing tech markets while primarily remaining a retail-focused company. Like most retailers, it faces limitations in growth and earnings potential inherent to the highly competitive retail sector. Nevertheless, Walmart’s stock continues to look appealing, particularly after its significant rally throughout 2024. Here are three compelling reasons to consider.
Walmart has reported a 3% increase in customer traffic in the third quarter compared to the same period last year. This growth is promising for any sizable retailer, especially in contrast to Target, which saw its traffic expand by just 2.4% during that timeframe.
More importantly, Walmart is effectively reaching a broader demographic. While many customers still go to Walmart seeking value and competitive prices, particularly amid rising inflation, the retailer is now also attracting higher-income shoppers through its e-commerce platform. This segment recently surpassed $100 billion in annual sales and saw a healthy growth rate of 27% in the last quarter alone. CEO Doug McMillon highlighted that "in-store volumes grew, pickup from stores accelerated, and delivery from stores achieved even faster growth," showcasing the versatility and effectiveness of Walmart’s customer engagement strategies.
Walmart’s competitive edges have led to strong financial performance that benefits investors. The company’s cash flow and profitability are on the rise, supported by factors beyond just increases in market share. After years of substantial investment in building its e-commerce infrastructure, Walmart is finally reaping profitability in this area. Additionally, successful strategies such as price reductions and effective inventory management have started to reflect positively on the bottom line.
Walmart is also generating supplementary revenue through channels like digital advertising, which has further bolstered its profit margins. Overall, operational earnings have increased by 9% over the past nine months, which is impressive considering Walmart’s enormous revenue base of almost $700 billion annually.
Investors must accept that owning a well-performing stock like Walmart will require a premium. Currently, Walmart’s shares are valued at around 1.1 times revenue, a noticeable leap from the typical valuation of approximately 0.6 times revenue seen in previous years. In comparison, Costco Wholesale holds a higher valuation of approximately 1.7 times sales. While it’s true that Walmart lacks Costco’s rapid growth and large membership fee income, this valuation gap creates opportunities for long-term investors willing to hold out for future gains.
Moreover, Walmart’s status as a reliable cash return generator shouldn’t be overlooked. As a Dividend King, it has consistently increased its dividend for an impressive 51 consecutive years, with its substantial cash flow suggesting room for continued growth and distributions. The management team also has the capacity to engage in stock buybacks, having repurchased $4.6 billion of its stock over the past four quarters, even after making significant investments in store remodels and technology upgrades.
In conclusion, while Walmart stock may not align with every investor's profile - particularly those focused on high-growth, high-profit sectors - it represents an attractive option for those seeking a balanced mix of growth, income, and stability in the retail market. With its expanding customer base, improving cash flow, and solid valuation, there’s ample reason to consider investing in this retail giant.
As long as the price is above 80.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 89.35
- Take Profit 1: 92.00
- Take Profit 2: 97.00
Alternative scenario:
If the level of 80.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 80.00
- Take Profit 1: 75.00
- Take Profit 2: 70.00
