Walmart (NYSE:WMT) reported strong financial results for the first quarter, and the giant retailer is extremely profitable and has several highly promising initiatives at this point. Moreover, the firm has clearly become adept at attracting a large percentage of American consumers while generating high profits in the process. Given these points, I believe that Walmart and Walmart stock are likely to perform very well over the long term.

But on the other hand, the firm recently issued a negative earnings preannouncement. Its valuation is also very high and it could face increased competition from Amazon (NASDAQ:AMZN) in the medium-to-long term. Also importantly, the retailer is likely to be significantly hurt if former President Donald Trump reenters the White House next year. In light of these concerns, I view Walmart stock as a classic “hold” for now.

Strong Financial Results and Highly Promising Initiatives

In Q1, Walmart’s revenue climbed 6% versus the same period a year earlier while its operating income advanced nearly 10%. Those are impressive growth figures for a huge retailer that relies on brick-and-mortar stores for a large percentage of its revenue.

A big part of Walmart’s success can be attributed to its “outside the box” initiatives. Indeed, CFO John David Rainey on June 12 said roughly 20% of the growth of the firm’s operating income is being generated by its Walmart+ and ad businesses. Walmart+ is the retailer’s loyalty program which is similar to Amazon Prime.

Launched in 2020, Walmart+ has proven helpful to the company in two ways. First, the members of the program spend about twice as much as average customers. They frequently buy “one or two items at a time.” The CFO indicated before Walmart+, customers did not often shop the retailer when they just needed one or two items. Meanwhile, Walmart+ is expanding as the firm improves it.

The CFO estimates the retailer can “double, triple, maybe even quadruple”
the size of its high margin advertising business…over the coming years.”

Finally, Rainey stated the company’s financial services business can grow faster than any other part of the company in the next five years. He noted that the firm is looking to find a new credit card issuer to partner with on a new joint venture.

Over the long term, I believe the firm’s ads, Walmart+ and financial services initiatives will meaningfully boost its top and bottom lines. As a result, I expect Walmart stock to perform at least as well as the overall U.S. stock market in the next five years.

Reasons To Be Cautious on Walmart Stock

On June 25, Rainey essentially issued a negative preannouncement regarding the company’s Q2 financial results. Specifically, he warned comparable sales would not rise as much year-over-year in Q2 as they did in Q1.

Additionally, Amazon reportedly intends to launch a specific section on its website that will feature inexpensive items from China. Since Walmart obtains a majority of its merchandise from China, Amazon could steal significant market share from Walmart.

And speaking of Walmart’s China imports, the return of Trump to the White House could spell trouble for the firm. That’s because Trump seems more intent on levying tariffs on imports than ever. China has been a major target of his tariffs in the past. If he is reelected and carries through with his threat of steep tariffs, Walmart’s profits could very well drop meaningfully.

Finally, the forward price-to-earnings ratio of Walmart stock is now 29 times. That’s a very high valuation for an established retailer whose profits are expected to rise less than 10% in 2025 versus 2024.

The Bottom Line on Walmart Stock

Walmart has a bright future. But given the company’s strong challenges and threats, along with its high valuation, I advise waiting for a better entry point before buying the shares.

On the date of publication, Larry Ramer held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.