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Walmart’s Unexpected Surge and Future Prospects
The Dow Jones Industrial Average comprises 30 companies, primarily stable, blue-chip entities known for paying dividends. Although these stocks are not typically associated with rapid growth, they can sometimes exceed expectations. For example, Walmart has seen its stock rise a remarkable 43.2% this year, pushing its market capitalization past $600 billion for the first time.
A Rare Success Story
Rapid growth can trigger a rise in stock prices, especially when most companies are struggling to show impressive results. Many consumer-focused businesses are facing challenges due to rising interest rates and economic uncertainties. Companies like Home Depot, Lowe’s, and Lululemon Athletica have reported that consumers are becoming more cautious, cutting back on discretionary spending such as home improvement projects, luxury vacations, and high-end apparel.
In contrast, Walmart has emerged as a strong performer. Its latest earnings report for the second quarter of fiscal year 2025 revealed faster-than-expected growth. The company revised its fiscal 2025 guidance upward for the second time, forecasting consolidated net sales growth of 3.75% to 4.75%, adjusted operating income growth of 6.5% to 8%, and adjusted earnings per share (EPS) of $2.35 to $2.43.
Initially, Walmart had projected 3% to 4% sales growth, 4% to 6% operating income growth, and $2.23 to $2.37 in EPS for fiscal 2025. The lower end of the new guidance now matches the higher end of the initial forecast. While other companies are revising their guidance downward and delivering disappointing results, Walmart is surpassing expectations.
Crucially, Walmart seems poised to maintain or even accelerate its growth in the coming years.
Shifting into a Higher Gear
Walmart’s appeal to consumers goes beyond its reputation for low prices. The retailer has significantly increased its capital expenditures (capex) in recent years, investing in new stores, store renovations, e-commerce, its Walmart+ home delivery service, and more. Over the past five years, Walmart’s revenue has grown by 27.6%, while its capex has nearly doubled, highlighting its focus on long-term growth over short-term results.
These investments are yielding tangible results. In the latest quarter, Walmart’s U.S. e-commerce sales grew 22%, and Walmart Connect advertising sales increased by 30%. Walmart Connect enables advertisers to leverage Walmart’s physical and online presence to connect sellers with buyers. This growing e-commerce business makes Walmart an even more attractive platform for advertisers. Internationally, Walmart’s e-commerce sales rose by 18%, and advertising sales increased by 23%.
Walmart has also implemented internal improvements to enhance efficiency, such as using generative artificial intelligence (AI) to optimize its product catalog. CEO Doug McMillon noted these advancements during the second-quarter earnings call.
The company has revamped its supply chain to support ongoing e-commerce growth, with over 45% of Walmart U.S. e-commerce fulfillment center volume now automated. CFO John Rainey expressed satisfaction with the returns on these investments, particularly in supply chain automation.
In summary, Walmart is achieving impressive results and benefiting from its long-term investments. It is evolving into a more robust business capable of competing in a challenging market and holding its own against e-commerce giants like Amazon.
Walmart Stock’s Valuation
Despite Walmart’s impressive performance, its earnings and dividend growth have not kept pace with its stock price. When stock prices rise faster than earnings and dividends, the stock becomes more expensive, and the dividend yield decreases.
Walmart’s price-to-earnings (P/E) ratio has climbed significantly above historical averages. Even its forward P/E ratio, based on analyst estimates for the next 12 months, exceeds 30.
Walmart’s dividend yield has also fallen to a modest 1.1%, below the S&P 500’s 1.3% yield. Currently, Walmart is not an attractive option for passive income investors.
A Great Company with a Premium Price Tag
Walmart is no longer a pure value stock; it has evolved into a hybrid of growth and value. Investors seeking higher yields may find better options within the Dow, such as Chevron and Coca-Cola.
However, those who believe in Walmart’s vision and support its increased capex may still consider the stock a viable long-term investment. While Walmart is not inexpensive, it is raising its dividend and repurchasing shares more aggressively than in previous years. Its earnings growth is noteworthy and may accelerate further when macroeconomic conditions improve.
Walmart is performing exceptionally well and has compelling reasons for its stock price surge. Nevertheless, the stock’s high valuation means it is best suited for risk-tolerant investors or those focused on its long-term potential over the next three to five years.
Investment Consideration
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Summary
Walmart has defied expectations with impressive growth, driven by increased capital expenditures and strategic investments. While its stock price has surged, its valuation has become expensive, making it less appealing for passive income. Nevertheless, Walmart’s long-term growth potential could attract risk-tolerant investors.
