Elevating eCommerce And AI Innovations Boosts Sales And Membership Growth

Key Takeaways

• Strategic use of eCommerce and technology, like generative AI, is set to enhance customer experiences and drive significant growth in eCommerce sales and net margins.
  
• Expansion and aggressive pricing strategies are aimed at attracting more sellers, boosting customer loyalty, and ultimately enhancing revenue growth and profitability.
  
• Walmart's strategies of enhancing shopping convenience, investing in automation, and expanding e-commerce and membership income present risks including increased costs, competition, and reliance on third-party sellers.

Catalysts

Engages in the operation of retail, wholesale, other units, and eCommerce worldwide.

• Continued strong sales growth and profit growth beyond expectations indicate that Walmart is strategically leveraging its broad-based business operations, likely impacting future revenue and earnings growth positively.
  
• Strategic investments in eCommerce and technology, including generative AI, are enhancing customer and seller experiences, contributing to operational efficiencies, and fostering eCommerce sales growth, which is expected to positively affect net margins and revenue.
  
• Expansion of Walmart's Marketplace and its significant sales growth can attract more sellers and diversify the product range, positively influencing revenue growth from increased customer traffic and sales volumes.
  
• The growing membership base for Walmart+ and Sam’s Club, with emphasis on double-digit growth and record-high membership counts, suggests increased recurring revenue streams, enhancing customer loyalty and driving long-term revenue growth.
  
• Aggressive price reductions and inflation management across categories signal a focus on value for customers that can drive market share gains and customer base expansion, ultimately impacting revenue growth and profitability.

Assumptions

• Analysts are assuming Walmart's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 3.3% in 3 years time.
• Analysts expect earnings to reach $24.4 billion (and earnings per share of $3.19) by about October 2027, up from $15.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $20.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.2x on those 2027 earnings, down from 42.2x today. This future PE is greater than the current PE for the US Consumer Retailing industry at 22.2x.
• Analysts expect the number of shares outstanding to decline by 1.56% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The focus on delivering convenience through various options such as in-store purchases, pick-ups, and faster deliveries, heightened by the implementation of AI to improve shopping experiences, could strain operating margins due to increased costs in logistics, technology investments, and labor.
  
• Investment in automation within the supply chain, despite its potential to improve efficiency and reduce costs in the long term, presents significant upfront capital expenditure risks which could affect short-term profitability margins.
  
• Expansion and reliance on e-commerce sales growth, while positive for revenue, face risks associated with high competition and variable profitability paths, potentially impacting net margins if growth stalls or costs exceed forecasts.
  
• Dependence on third-party sellers for Marketplace sales growth, offering increased item and seller count, introduces risks related to quality control, fulfillment challenges, and competitive price pressures, possibly affecting revenue and gross margins.
  
• The emphasis on growing membership income through Walmart+ and Sam’s Club, although beneficial for recurring revenue, entails risks in customer acquisition and retention costs amidst fierce competition from other membership and subscription services, potentially impacting net income growth.

Valuation

• The analysts have a consensus price target of $83.94 for Walmart based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $98.0, and the most bearish reporting a price target of just $56.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $748.4 billion, earnings will come to $24.4 billion, and it would be trading on a PE ratio of 31.2x, assuming you use a discount rate of 5.8%.
• Given the current share price of $81.65, the analyst's price target of $83.94 is 2.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.