Omnichannel Expansion And Automation Will Strengthen Future Profitability

Key Takeaways

• Robust e-commerce and advertising growth strengthen revenue base and may enhance net margins via higher-margin segments.
  
• Digital expansion and supply chain automation bolster potential revenue and profitability through efficient omnichannel strategy and lower costs.
  
• Margin pressures from GLP-1 drugs, unforeseen events, competitive pressures, and currency fluctuations pose risks to Walmart's revenue growth and net margins.

Catalysts

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

• Walmart is experiencing robust growth in e-commerce (up 27%) and advertising (up 28%), contributing to a stable revenue base and potentially enhancing net margins through these higher-margin segments.
  
• The company is expanding its digital and membership capabilities, with rapid growth in platforms like Flipkart and Walmart+, reinforcing an omnichannel strategy that can drive revenue and profit growth in future quarters.
  
• Automation of supply chain and increased delivery efficiency are expected to lower costs, which can contribute to improved net margins and overall profitability as digital fulfillment scales up.
  
• Expansion and diversification of ancillary revenue streams such as marketplace sales and data services are increasing, with marketplace sales up 42% this quarter, suggesting potential revenue growth through higher-margin businesses.
  
• International operations, especially in rapidly growing markets like China and Mexico, show promise for significant revenue expansion, which can leverage Walmart's global scale and expertise for overall earnings growth.

Walmart Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Walmart's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 3.7% in 3 years time.
• Analysts expect earnings to reach $26.8 billion (and earnings per share of $3.41) by about December 2027, up from $19.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.2x on those 2027 earnings, down from 39.0x today. This future PE is greater than the current PE for the US Consumer Retailing industry at 25.3x.
• Analysts expect the number of shares outstanding to decline by 0.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Walmart Future Earnings Per Share Growth

Risks

• Walmart is experiencing margin pressure due to the growth of GLP-1 drugs, which affects its gross profit and could impact net margins.
  
• A U.S. port strike and two large hurricanes temporarily lifted sales growth but negatively affected operating income, illustrating a risk to earnings from unforeseen external events.
  
• Competitive pressures from existing and emerging competitors could impact sales growth and require price investment, affecting Walmart’s revenue and margins.
  
• Historical e-commerce losses, coupled with Walmart’s significant investments in automation and technology, indicate continued expense pressures that may weigh on net margins and earnings growth.
  
• Currency fluctuations have negatively impacted reported sales and operating income, presenting a risk to revenue and earnings if adverse currency trends persist.

Valuation

• The analysts have a consensus price target of $98.09 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 $115.0, and the most bearish reporting a price target of just $58.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $730.5 billion, earnings will come to $26.8 billion, and it would be trading on a PE ratio of 34.2x, assuming you use a discount rate of 5.9%.
• Given the current share price of $95.42, the analyst's price target of $98.09 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.