For shareholders of Wal-Mart Stores, Inc. (NYSE:WMT), it looks like 2016 will turn out to be a fairly good year. Walmart stock is up about 17% year-to-date, compaired to Target Corporation (NYSE:TGT), which has only been able to muster a 5.7% gain. Even so, WMT stock still has skeptics.
Famed investor Warren Buffett is one of them. His firm, Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B), has sold substantial amounts during the past three quarters, with only 13 million shares left. Back in 2014, the holding was at about 60 million shares of Walmart stock.
Perhaps the main reason is the ominous threat of Amazon.com, Inc. (NASDAQ:AMZN). According to Buffett: “[AMZN] is a big, big force and it has already disrupted plenty of people and it will disrupt more.”
Is Buffett right? Or is there value in WMT stock? The following are three pros and three cons to owning Walmart stock.
Three Pros to Owning Walmart Stock
Massive Scale: WMT is the world’s largest company in terms of revenues; it serves a whopping 260 million customers a week and it has 11,528 store locations across the world.
WMT stock has also been able to keep up a decent growth path, which is no easy feat for a company of its size. For the last nine straight quarters, there were increases in same-store sales.
Digital: Walmart stock has been a laggard with e-commerce. But over the last few years, the company has made serious investments to become much more competitive. It also helps that WMT has had a long history of innovation with logistics, such as using algorithms and forecasting systems to help with inventory management.
Interestingly enough, during the last few months, the company has added a hefty 8 million SKUs (stock keeping units) to the website (for a total of over 23 million) and there are 1,000 more online grocery pickup locations. On top of that, monthly traffic — to Walmart.com — is now about 85 million visitors. A key part of the growth has come from the recent $3 billion acquisition of Jet.com, which is an innovator in optimizing low-cost online baskets.
Something else: WMT has been making a big digital push into China. To this end, the company has taken a 10% stake in JD.Com Inc(ADR) (NASDAQ:JD), which is one of the country’s largest e-commerce operators. Some of the offerings from the partnership include using JD as the platform to sell Sam’s Club premium products using same-day and next-day service as well as powering Walmart Global, which is for cross border transactions.
Financials: In the latest quarter, revenues came to about $118.2 billion and profits were $3.03 billion, or 98 cents on WMT stock.
What’s more, the company is definitely mindful of Walmart stock owners. During the past year, it returned more than $10 billion in the form of dividends and share repurchases.
Speaking of the dividend, it has increased for 43 consecutive years! Currently, the yield is roughly 2.9%.
Three Cons to Owning Walmart Stock
Cost Pressures: WMT has operations in 27 countries, with about 26% of revenues coming from outside the U.S. While this is a good source of diversification, the company has still felt the pressures of the rising dollar.
But of course, the biggest cost issue for Walmart is labor. In various states, there have been moves to increase the minimum wage, which would certainly weigh on the company’s profit. But, even if none of the legislation passes, it may not matter: The fact is that labor markets are getting tighter as unemployment has reached levels not seen since 2007.
And because of the size and influence of WMT, the company is often a lightning rod of politics. In other words, the company is likely to get much scrutiny if it tries to get tougher on labor or introduce automation technologies.
Competition: The competition for Walmart stock is intense. First of all, WMT must fight against mega retailers like TGT and Costco Wholesale Corporation (NASDAQ:COST). These companies can essentially match any move that it may make.
Meanwhile, there is pressure from dollar stores. These companies, which include Dollar General Corp. (NYSE:DG) and Dollar Tree, Inc. (NASDAQ:DLTR), have proven to be quite adept at finding valuable niche opportunities.
Then there is the mighty AMZN. The company has the Walmart-like philosophy of putting the customer first, but the key difference is that innovation is at the core of the company’s DNA. AMZN also has the ability to provide lower costs as it benefits from its Prime service and the highly profitable Amazon Web Services platform.
Disruption: In today’s world, no business is safe. As seen with the case of Uber, an industry can quickly come under attack.
So for WMT stock, the biggest threat may not even be AMZN. Instead, the biggest threat for Walmart could be the next hot startup from Silicon Valley!
The problem for WMT stock, though, is that the company has a massive set of real estate assets that could be a costly albatross. How popular will shopping at mega stores be when consumers are more inclined to use their smartphones, Echo or other virtual assistants to make an order?
Buy or Sell WMT Stock?
Given Walmart’s long history of being focused on customer needs, it seems unlikely that there will be some kind of implosion, as seen with Sears Holdings Corp (NASDAQ:SHLD).
Despite this, the giant retailer still faces tough challenges. Let’s face it, the secular trend towards e-commerce and mobile are having a deep impact on shopping habits. And unfortunately, WMT has been fairly late in its response.
The result is that AMZN has continued to be the leading force in innovation. If anything, the company is the top-of-mind destination when it comes to e-commerce — and this will be incredibly hard to fight.
So in light of all this, Walmart stock does not look like a good bet for investors right now since there will likely be difficulties in churning out growth.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.