Target Corporation (NYSE:TGT) has posted a strong rally over the past year. In fact, TGT stock has gained over 60% since hitting a five-year low roughly a year ago.

What’s interesting about the rally is that it’s not as if Target’s performance has been that strong. Q1 earnings missed estimates and sent TGT stock tumbling. FY18 guidance suggests adjusted earnings-per-share of $5.15-$5.45, against $4.69, three years earlier. But backing out the benefits of tax reform, Target earnings will actually decline over that period. Gross, EBIT and operating margins all are likely to compress on an adjusted basis.

That alone doesn’t mean Target stock should have declined, nor does it mean that it will decline going forward. Much of the margin pressure is coming from investments such as higher wages and increased shipping options. And if those investments pay off, TGT stock should see further benefits.

That’s why the company’s expanded launch of same-day shipping announced this week seems potentially pivotal for Target earnings — and for Target stock. Target is trying to establish itself as a pure omnichannel retailer as it competes with Walmart Inc (NYSE:WMT) and Amazon.com, Inc. (NASDAQ:AMZN), among others. If that effort works, there’s still plenty of upside left for TGT. If it doesn’t, the company will have its back up against the wall.

Target Continues to Expand

On Thursday, Target announced that it was halfway through its launch of same-day delivery through Shipt, which it acquired in December for $550 million. And Chicago — a key market for the Minnesota-based retailer — will be the first city where all four Target delivery services will be available.

Target Restock offers next-day delivery of home essentials. Shipt same-day delivery will offer “all major product categories” nationwide by next year. Drive Up allows customers to order online and pick up at a store. And, according to the company’s Q4 conference call, online orders will be fulfilled from stores that would be cheaper than the distribution/fulfillment center model used by most retailers, including Amazon.

Obviously, the efforts aren’t cheap. Target’s capital expenditures have risen from $1.4 billion in FY15 to a guided ~$3.5 billion this year. Margins have come down, as noted. The Q1 report actually highlighted the “good news, bad news” effect so far: earnings missed expectations, but revenue, including 3% same-store sales, outperformed. Indeed, Target’s traffic gain of 3.7% was its best in over a decade, per the Q1 release.

For now, the market is focusing on the positives. TGT stock quickly recaptured its post-earnings losses and reached an 18-month high. But there’s still a long way to go.

Is TGT Stock the Next WMT?

The obvious risk for Target is that its strategies don’t work — and Walmart stock shows what might happen if that indeed is the case. Walmart went a different route in building out its omnichannel business, largely through acquisitions like the purchase of Jet.com. Investors loved the strategy, argued Walmart was a legitimate competitor to Amazon, and sent WMT shares to $110. Two middling earnings reports later, WMT has lost almost a quarter of its value.

For Target, early returns seem good. Q4 comps were strong as well. But in both of the past two quarters, the company did benefit from easy comparisons, with Q4 FY16 comps down 1.5% and the Q1 FY17 print at a loss of 1.3%.

Meanwhile, margins are getting hit, and these aren’t necessarily one-time investments. Wages have been raised. but they will go higher still. There are some one-time costs to adding the delivery and fulfillment services, but those offerings, too, will add to SG&A over time. And digital fulfillment costs also pressure gross margin, as the company has pointed out after each of the last two quarters.

What concerns me is that, those pressures aside, I’m not sure Target necessarily is a great business. The grocery sector has been hammered of late, with industry leader Kroger Co (NYSE:KR) still down about 40% from late 2015 highs. I still think the same pressures facing consumer products manufacturers — notably the desire for smaller brands — are hitting the retailers of those brands.

And Target isn’t necessarily making its recent investments because it wants to, but rather because it has to. That’s always risky.

Target Stock Could Soar

That said, if Target and CEO Brian Cornell are right, there’s room for huge upside in TGT stock. Operating margins in FY17 were just 6%, and likely will be a tick lower in FY18. It doesn’t take much in the way of expansion to drive solid earnings growth. Whether it’s SG&A leverage from continued strong comps, or a few basis points here and there from more efficiency in the delivery options, 100 bps in expansion drives earnings up 17%, even if you disregard any help on the top line.

And even after the big gains, TGT stock still trades at less than 15x the midpoint of FY18 guidance. There’s a reasonable path from a current price below $80 to well over $100. Modest EPS growth over the next two years (think 8-10% a year) would get EPS well past $6. A EPS multiple in the 16-18x range, which is in line with past valuations, and closer to that of WMT, would value TGT stock in the range of $100-$115.

So there’s still upside to betting on Target stock. The question is whether that bet is worth taking, and the answer will rely heavily on whether the billions the company is spending in 2018 pay off in 2020 and beyond.

As of this writing, Vince Martin has no positions in any securities mentioned.