3 Danger Signs for Wal-Mart Stores Inc Stock

WMT stock - 3 Danger Signs for Wal-Mart Stores Inc Stock

Source: Shutterstock

Wal-Mart Stores Inc (NYSE:WMT) has been acting like, well, when the legendary Sam Walton was in charge. The company is again making bold moves as well as putting its scale to work. No doubt, Wall Street has caught on as WMT stock has come back to life.

During the past year, the shares have gained a sizzling 47% to $100. By comparison, the SPDR S&P Retail (ETF)(NYSEARCA:XRT) gained 5.5%.

The latest earnings report certainly highlighted the progress. WMT posted its 13-consecutive quarterly gain in same-store sales and e-commerce revenues spiked 50%.

Part of the success has been due to tough cutbacks and store closures. But of course, WMT also has been making major investments in its ecommerce platform, especially with acquisitions. The company has purchased operators like Jet.com, Modcloth and Bonobos.

While all this is encouraging, I think there still should be some caution with WMT. It seems that Wall Street may be getting over-excited about the developments.
So then, let’s take a look:

Risk #1: Amazon.com Factor

So far, WMT has done a pretty good job in blunting the impact of the mighty Amazon.com, Inc. (NASDAQ:AMZN). Even the ecommerce giant’s deal for Whole Foods has not had much of an impact on the food business.

Yet investors should still worry. AMZN has tremendous advantages and the resources to pull off transformative deals. For example, one scenario is to make a purchase of Target Corporation (NYSE:TGT).

While this seems kind of outlandish, it actually has merit. Keep in mind that veteran analyst Gene Munster – who is with Loop Ventures – believes that an AMZN+TGT combo is possible for this year!

If so, it could mean trouble for WMT’s efforts. As InvestorPlace.com’s James Brumley has pointed out, TGT could gain a competitive advantage with AMZN’s tremendous data on customers and digital marketing capabilities. There would also be advantages for leveraging Target locations for same-day delivery.

Risk #2: Growth Is Still Slow

Even with the increase in momentum lately, WMT stock is still low-growth. During the latest quarter, revenues rose by about 4.2% to $123.2 billion. For the most part, WMT is a mature business.

Granted, the ecommerce opportunity is large, as more and more consumers are using their PCs and smartphones to shop. But the fact is that the digital business is still relatively small for WMT and has been decelerating over the past few quarters. The estimate is that the segment will account for $17.5 billion or 3.5% of overall revenues for the past 12 months.

And yes, the investments in ecommerce are far from cheap or without risk. Let’s face it, there are potential landmines when engaging in aggressive M&A, especially with early-stage companies.

Risk #3: Valuation

The run-up in WMT stock has certainly put the valuation on the expensive side. Consider that the price-to-earnings ratio is at a hefty 26.5X. This is certainly a lofty premium in light of the slow growth rate and the inherent risks, such as to the ecommerce business.

To put things into perspective, the multiple on WMT stock is higher than a variety of standout tech operators like Oracle Corporation (NYSE:ORCL). And yes, the valuation is way beyond the levels of other large retailers. Note that TGT currently trades at only 14X. In fact, both TGT and WMT stock have historically traded at about 15 to 17 or so.

In other words, for WMT stock, it would not be surprising for there to be a pause on the bull run, as it seems that much of the good news has already been baked in.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2018/01/wmt-stock-danger-signs/.

©2021 InvestorPlace Media, LLC