By Jinjoo Lee |Photography by Thomas Simonetti for WSJ
Think tech stocks are expensive? Try Walmart.
America's biggest retailer has become a true investor darling. Its shares have risen about 27% this year, bringing its market value above $900 billion. The stock is now valued at roughly 40 times forward earnings, more expensive on that metric than six of the Magnificent Seven stocks such as Nvidia and Microsoft. Historically, it has traded at a multiple of about 23 times.
When Walmart moves its listing to the tech-heavy Nasdaq on Tuesday, its shares could move up another leg. Analysts at Morgan Stanley estimate that the Nasdaq inclusion could boost demand for Walmart's shares from passive investment vehicles -- such as ETFs and index trackers -- by $20 billion or more.
Few on Wall Street are betting against the retail giant. Only one Wall Street analyst out of the 42 that FactSet polls gives it a "sell" rating. As of September, Walmart was the least shorted stock in the S&P 500, according to BofA Securities.
Walmart's multiple has risen over the past three years as its supply chain and e-commerce investment paid off in higher profits. After many years of declining or flat earnings, Walmart's net income is set to grow at a double-digit percentage for the third consecutive year. But there could be a bit of froth building up, too. This year alone, its forward earnings multiple has expanded nearly 20%, even as analysts on average reduced earnings expectations for the upcoming fiscal year.
Bulls point to the powerful moat that Walmart has built over the years, especially in e-commerce. With improved online assortment and delivery, Walmart U.S. e-commerce sales have been growing at over 20% year over year in 10 of the past 11 quarters, according to Visible Alpha. Walmart can now deliver within three hours to 95% of U.S. households, up from about 76% two years ago, according to a report from BofA Global Research. This online growth helps Walmart generate high-margin revenue, such as advertising, membership fees and fulfillment services for third-party marketplace sellers.
It helps that competition looks weak: Target is still reeling from past mistakes and grocery giant Kroger failed to scale up after its Albertsons acquisition fell through.
But can Walmart keep delivering tech-like growth? Steven Shemesh, retail analyst at RBC Capital Markets, notes that Walmart is still in the early stages of expanding its high-margin businesses. Its ad revenue last year was roughly 8% of Amazon's. And only about 18 million U.S. households have signed up for Walmart's paid membership, a small fraction compared with Amazon's 107 million Prime members, according to estimates from Evercore.
Walmart's U.S. advertising business has indeed grown at a healthy year-over-year pace of about 30% in recent quarters. That isn't a huge number compared with Amazon, whose advertising business grew at a compound annual growth rate of about 42% since 2017 when its ad revenues were roughly Walmart's size. Shemesh says Walmart is "very measured" in increasing that business to make sure its website and app aren't flooded with ads. But the bigger concern is that Walmart today isn't operating in a white space as Amazon did many years ago. It also lacks exposure to nonretail-related growth areas such as Amazon's cloud business.
Far-out estimates should be taken with a grain of salt, but analysts expect Walmart's earnings to grow at an average annual rate of about 8% over the long term, according to S&P Global Market Intelligence. Among S&P 500 companies with an earnings multiple exceeding 30 times, Walmart ranks near the bottom on long-term earnings growth expectations, according to data from S&P Global Market Intelligence. (This excludes real-estate investment trusts, which distribute much of their taxable income to shareholders.)
If tech-like growth isn't in the cards, Walmart's multiple might be justified if it can achieve reliable, even if not eye-watering, growth in earnings and returns over a long period of time. Costco, for example, commands an earnings multiple higher than Walmart even with modest earnings growth expectations.
But what it lacks in flashiness, Costco makes up for in consistency that Walmart hasn't yet matched. Costco has seen growth in same-store sales every year since 2000 and delivered a return on invested capital exceeding 10% almost every year since 1998. The last time Walmart U.S. saw a same-store sales decline was in 2014, but it also suffered disappointingly slow growth from 2015 to 2017. And returns on investment have been patchier because of its aggressive spending.
Perhaps greater consistency is in the cards for Walmart. In part, this will depend on whether the company is done with its heavy cycle of investment. On Walmart's latest earnings call, an analyst asked if the company's leadership succession -- Chief Executive Doug McMillon will be stepping down next month -- signals another phase of spending. So far, incoming CEO John Furner, the head of Walmart U.S., has said the company will take a "disciplined" approach. But expanding an already big business could involve even more spending, and it will be difficult for Walmart to avoid hefty spending on artificial intelligence if that's what it takes to keep up with Amazon.
At these high multiples, the market is counting on Walmart to deliver tech-like growth or Costco-like consistency, two things that the company doesn't have a long track record of. Walmart still has a lot to prove.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
(END) Dow Jones Newswires
December 05, 2025 05:30 ET (10:30 GMT)
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