Wal-Mart Stores, Inc.: Don’t Be Fooled, There’s No Growth With WMT Stock

You know how there’s this belief on Wall Street that Wal-Mart Stores, Inc. (WMT) is no longer a growth company? CEO Doug McMillon begs to defer.

Wal-Mart Stores, Inc.: Don't Be Fooled, There's No Growth With WMT Stock

During the Consumer Goods Forum conference, which was held in Cape Town, South Africa between June 15 and 17, McMillon said, “So sometimes people say Walmart is not really a growth company any more. I want to say: ‘Well, if we layer on $50 to $60 billion, would that count, in three years?”

That’s a lot of cash to add to its top line in three years. If achieved, WMT stock will have added approximately 4% to its top line over a three-year period on a compound annual growth rate basis.

However, WMT stock has only seen an increase of 0.41% in its CAGR over the last three years, and 2.7% CAGR over the last five years. This highlights just how ambitious the $60 billion revenue addition call is.

While the prospect of a revenue boost may leave investors optimistic, I believe the way it would achieve this boost reeks of shrinking margins. Two words describe the problem here: China and Amazon.com, Inc. (AMZN).

China and AMZN: Two Big Problems for Walmart

Given McMillon’s optimism about WMT’s prospects in China, it’s likely that a lot of that revenue increase is expected to come from China.

At the conference, he said, “China is a tremendous opportunity and I am very excited about China, bullish on China, but it’s extraordinarily competitive, very creative competitors involved, so it’s going to be tough.”

Investors need to bear in mind that China remains one of the places to turn to when seeking low-cost goods. So, if Walmart were looking to grow in China, which it should, it would have to conform and offer low-cost items consistently.

The fact that WMT has previously mentioned improving its pricing as one of its growth strategies supports the idea that Walmart is looking to woo customers with cheaper prices.

So, yes, WMT stock will get more sales out of China, but it would be at the expense of margins.

Next, if you’ve followed Walmart’s moves for any length of time, you will have noticed that it always wants to put itself in competition against Amazon. Of course, that’s the right thing to do. The problem is that it doesn’t have the same strategy as Amazon.

Don’t get this wrong, it’s an absolute necessity for companies to add to their top-line. After all, that’s one of the measures of how fast a company is expanding. However, in the internet era, especially when you’re a retailer, you can’t just hope to sell tons of goods and expect to be highly profitable.

WMT stock is a flat-out retailer. And it always aims to compete with Amazon, which has a complex system that allows it to milk out a bit more than just money for items purchased from its customers. Amazon can afford to have a small margin from retail sales and still be profitable over the long-term.

But, as explained above, when WMT stock successfully makes $60 billion in revenue over the next three years by joining the race to the bottom, what else can it do with the customers it acquires, other than sell more low-margin items to them? That doesn’t sound like a plan that would boost profitability over the long-term.

Amazon is using Amazon Prime to build a huge community through which it can make sustainable cash over the long-term. Yes, Amazon also offers low-margin items to woo customers, but there is a lot more value it will derive over the long-term.

Walmart’s strategy is only beneficial during economic downturns when consumers have less disposable income and become best friends with budgeting apps. So, WMT stock is surely one to consider for economic downturns.

Bottom Line for WMT Stock

Walmart is a great company that has many achievements over the years. And it is a stock that certainly offers stability for long-term investors.

However, the point of the whole discussion here is that WMT stock is not as much a growth stock as CEO McMillon would have you believe. Don’t even think of buying WMT if you seek growth.

As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/06/walmart-wmt-stock-fooled-no-growth/.

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