When global retail giant Walmart (NYSE:WMT) beat expectations with robust second quarter numbers — their best numbers in a decade — it served as further proof that the company is gaining share in the all-important e-commerce market. Investors promptly drove WMT stock from $90 to $100.
I warned that at $100, the rally in Walmart stock looked close to a peak. The argument was simple. A $100 price tag seemed to incorporate all potential upside from e-commerce share gains, the $100 level was a level that WMT stock had failed to hold before, and the valuation was at historically unsustainable levels.
Walmart stock has since given back on that gain: Today, WMT’s price tag is around $95.
I think it is time to buy the dip in WMT stock. The retailer’s recent quarterly numbers imply that this company has some serious operational momentum right now. Walmart is carrying that operational momentum into what promises to be a big holiday season thanks to robust consumer confidence and strength. Put those two together, and it becomes obvious that Walmart is on track to have a record holiday season.
That record holiday season will likely push Walmart stock towards $100 and potentially higher by the end of the year. As such, at $95 and with only two months to go before the holiday shopping season kicks in, I think now is a good time to buy WMT.
Walmart Is On Fire
After years of being victim to the Amazon (NASDAQ:AMZN) retail onslaught, Walmart has finally bounced back and found its groove. Now, the company is doing better than it has in several years, and arguably the best its done since the 2008 Recession.
To find evidence of this, look no further than the Q2 numbers. Comparable sales growth at Walmart U.S. locations increased by 4.5%, the best mark in more than a decade. Traffic and average ticket were both up more than 2%. E-commerce growth re-accelerated to 40%, more in-line with historical rates than the prior two quarter’s anomalies of low, 20-30% e-commerce growth rates. Margin compression is moderating thanks to robust revenue growth, and higher average tickets are offsetting digital erosion on the gross margin line.
Overall, Walmart’s second quarter report was nothing short of spectacular. This strength won’t quit anytime soon. If anything, the growth narrative should actually get a big boost in the near-term.
Walmart is setting up for a record holiday season. The U.S. economy is about as strong as it has been in recent memory. The stock market is at all time highs. Consumers are confident and expressing that confidence through increased spend. All this is happening just two months away from the holiday shopping season starting.
In other words, all signs point to the 2018 holiday shopping season being one for the record books. Considering Walmart is on fire ahead of that huge catalyst, it seems highly likely that it’ll also set big records this holiday season.
Walmart Stock Could Head North of $100
With such a big catalyst on the horizon, Walmart stock looks ready to jump toward $100 and potentially higher by the end of the year.
A major reason for the big move in WMT stock over the past year is due to the company’s robust e-commerce growth. But, the e-commerce business still has a long ways to go. According to eMarketer, Walmart controls only 3.7% of the e-commerce market in America, versus a 6.4% share of the total U.S. retail market.
Amazon doesn’t have a robust offline presence like Walmart. So, dreams of Walmart controlling 6.4% share of the e-commerce market in the U.S. seem far-fetched. But, as the e-commerce landscape becomes a more-equal playing field due to everyone building out omni-channel commerce capabilities, Walmart could easily be looking at 5% share and up over the next several years.
Growing share in a secular growth market is a recipe for success for Walmart. Assuming that the folks in Bentonville can maintain 3% sales growth over the next several years aided by e-commerce market share expansion, and that margins largely stabilize due to healthy revenue growth, I think Walmart stock is worth around $100 today. Thus, even if sentiment is normal into the end of the year, I think Walmart stock could rally to $100.
But, sentiment won’t be normal. It should be bullish against the backdrop of a strong holiday shopping reason. Thus, WMT will likely trade above fair value by the end of the year, implying $100-plus prices in two to three months.
Bottom Line on WMT Stock
Assuming Walmart sustains its transition as a formidable omni-channel retailer with a rapidly growing e-commerce business, at $95 the stock looks undervalued ahead of what should be a huge catalyst with strong holiday shopping. A slightly undervalued stock ahead of a big catalyst is usually a recipe for healthy share price appreciation in a near-term window. I think that is exactly what we have with Walmart stock.
As of this writing, Luke Lango was long WMT and AMZN.