Inside the Retail Giant: Unraveling Walmart’s Investment Potential
Introduction
As a kid, going to Walmart was always a great time. I got to wander the aisles aimlessly looking at food, cool clothes, and bikes while my parents bought our weekly groceries, clothes, and rarely bikes at “everyday low prices”. However, right now it’s not just the food, clothes, and bikes that are at an “everyday low price”; it’s also the company itself, creating an advantageous situation for long-term value investors to take advantage of. As we break down the qualitative and quantitative factors influencing Walmart’s discounted valuation, you’ll notice that Walmart’s current stock price of around 60 dollars is a severe discount from its intrinsic value. Due to its wide yet still expanding economic moat, expansions into new industries and technologies, and strong financial backing with a discounted valuation, Walmart is a definite BUY with significant long-term growth potential for value investors.
Company and Industry Overview
Based in Bentonville, Arkansas, Walmart has grown from a small local chain in the South to the world’s largest retailer operating in over 19 countries worldwide with multiple business sectors, notably Walmart U.S., Sam’s Club, and Walmart International. Walmart offers an array of goods and services, most importantly retail, grocery, e-commerce. Retail is what Walmart is most known for, as they operate over 10,000 superstores nationwide providing customers with a huge selection of products to choose from, including groceries, clothes, and many others. It’s e-commerce segment provides similar goods and services just through a different medium, diversifying Walmart’s business capabilities and reach.
Porter’s 5 Forces Analysis
Let’s start by analyzing Walmart’s internal and external environments via a Porter’s 5 Forces Analysis.
- Competition (Significant Threat — 1 out of 5): Walmart faces competition on three fronts: from e-commerce companies like Amazon, eBay, Alibaba, and JD.com, retail giants like Target, Costco, and Kroger, as well as traditional small and local businesses. Facing intense competition on many fronts proves to be one of Walmart’s main risks, however Walmart still holds many advantages in resources, supply-chain management, and competitive pricing, which prove to differentiate Walmart from its current competitors.
- Threat of New Entrants (Insignificant — 4 out of 5): While small, retail stores continue to pop up with novel and exciting products, creating a company as diversified, efficient, and innovative as Walmart seems almost impossible. Factors like exponentially high start-up costs, brand loyalty, and complex supply-chain management discourage new firms from entering the industry, as competing with giants like Walmart, Amazon, and Target would be extremely difficult.
- Supplier Bargaining Power (Low — 3 out of 5): Since Walmart is such a huge company with a diverse consumer base and huge revenue, Walmart has significant bargaining power over its suppliers, allowing the company to create favorable prices and contract terms with suppliers. Some suppliers providing individual, unique products may have some more bargaining power, but for the most part, Walmart holds most of the power over their suppliers.
- Consumer Bargaining Power (Moderate — 2 out of 5): Most of Walmart’s customers could actually give their business to other giants (e.g. Target, Costco, or Amazon) or small, brick-and-mortar businesses, however Walmart mitigates this risk by providing the lowest average prices among its biggest competitors and creating a loyal consumer base through effective pricing and brand recognition.
- Threat of Substitutes (Moderate — 2 out of 5): Walmart’s threat of substitutes is derived from its competition with companies in other industries (ex: Walmart’s competition with other small, retail businesses, and e-commerce companies like Amazon and eBay). By expanding its services into the e-commerce industry and offering the lowest prices out of all its major competitors, Walmart mitigates the threat substitutes pose.
Wide Moat
To explore Walmart’s wide moat, we need to break down the inspection into three areas: supply chain management, technological innovation, and brand strength.
- Supply Chain/ Supply Chain Management: Walmart’s supply chain is one of, if not the most important of Walmart’s competitive advantages. Walmart incorporated Vendor Managed Inventory (VMI) in the 1980’s, making manufacturers responsible for managing their products instead of Walmart, cutting costs exponentially. It also began using cross docking, a strategy where a truck gets unloaded and those goods go directly into the next truck without any holding area in between, eliminating the need for distribution centers and further decreasing input costs. Additionally, using technology like barcodes and radio frequency identification tags have made it easier to identify and locate products, further increasing its supply chain’s efficiency. Having such a developed and sophisticated supply chain allows Walmart to save money, time, and hassle, allowing them to continue providing customers with quality products at “everyday low prices”.
- Technological Innovation: Investing in e-commerce, advertising more effectively through its new integration of Vizio, and implementing machine learning into its business model have allowed the company to stay competitive, expand into growing industries, and drive revenue. With Forbes stating that the company invested 11 billion dollars into e-commerce, supply chain, and technology and a 2024 capital expenditure value of 20.6 billion dollars, Walmart’s technological innovation remains strong and will likely improve in the upcoming years.
- Brand Strength and Reputation: Walmart’s effective advertising and reputation for providing its “everyday low prices” without sacrificing quality attracts price-conscious consumers and makes it more difficult for customers to exert their bargaining power and get their goods from a competitor.
Income and Balance Sheet Analysis
In the above financial statement for Walmart in the following 4 years, there were a couple key points which I noted as important factors contributing to Walmart’s future. First, I noted impressive year-over-year (YoY) revenue growth of 6.02% along with solid YoY gross profit growth of 7.05%. The company’s EPS is also growing at a staggering YoY pace of 34% — all three of these statistics illuminate the health and strength of the business looking forward. Furthermore, Walmart’s capital expenditures of 20.6 billion dollars exceed the competitor average of only 12.1 billion dollars (found by averaging Walmart’s nine biggest competitors, including Target, Amazon, Alibaba, etc.), demonstrating the company’s commitment to investing in growth, development, and innovation that will drive future revenue.
Revenue Projections
For revenue projections, I decided to use bullish, base, and bearish cases, each weighted 30%, 50%, and 20% respectively. I then looked into projecting each sector of Walmart’s businesses, including Sam’s Club, Walmart U.S., and Walmart International, taking into account past growth rates, projected macroeconomic trends, as well as fear of increased competition in the future. I predicted Walmart International’s growth to be the most explosive, given it has the most growth potential of the three sectors. Walmart International integrating e-commerce has significant growth potential as Walmart continues to expand to other parts of the world and reach new customer bases. I projected the slowest growth for Sam’s Club because of intense competition from players like Costco and the past revenue growth of the sector. I projected Walmart U.S. to grow at relatively slow rates as well due to fear of growing competition, competitors more effectively utilizing their supply chains to cut costs and hence lowering prices, and a fear of future macroeconomic conditions. I chose conservative estimates to demonstrate that even in harsh economic conditions and stagnating growth, Walmart still can somewhat grow their revenue and remain profitable, boosting the intrinsic value of the stock.
DCF
The assumptions for the five-year DCF include a constant 26.5% tax rate, -0.7% of sales for net working capital, a cost of debt of 5.2%, a risk free rate (10-year treasury yield) of 4.2%, a beta of 0.4924, and an average S&P 500 return rate of 10%. Taking all these assumptions and revenue projections into account gives us an intrinsic value of $83.72, representing a 38.4% upside from the current stock price.
ESG
Walmart overall performs relatively well in ESG rankings, as CSRHub (a company that tracks ESG performance of companies) ranks Walmart in the 86th percentile out of 36,122 companies. Walmart is making strides in improving their ESG rankings still, taking on their biggest environmental project called Project Gigaton — a project incorporating over 5,900 suppliers who aim to prevent a gigaton of greenhouse gasses from being released by 2030. In terms of social contributions, Walmart donated over 1.7 billion dollars in 2023 with over 16 million going to disaster recovery and over 655 million pounds of food being donated. And lastly for governance, Walmart is a top 50 company worldwide for diversity and disability inclusion with strong leadership and employee code of conduct. All of these factors combined contribute to the 86th percentile ranking, as the company’s social and governance scores are outstanding while Walmart could likely improve its environmental impact.
Artificial Intelligence Adoption
Walmart is a leader in integrating AI into improving all aspects of its business. From voice shopping and generative AI searching using AI to optimize the customer experience to Ask Sam, an AI assistant helping employees locate products, look up prices, check employee messages and more, AI is quickly enhancing the employee and customer experiences. But most importantly, Walmart is using AI as a way to further develop their supply chain management, for using AI to close deals with its suppliers has resulted in a staggering 1.5% in cost savings and an average payment extension of 35 days. Amidst an AI revolution, Walmart is proving to lead the revolution and development of the technology for the foreseeable future.
Specific Stock
Walmart’s stock has been in a continued uptrend since 2015, not showing any resistance to the upward motion of the stock, and with all of the factors the business has going for it, I doubt that there will be any reversal soon. Additionally, the company continues to provide its investors with solid dividends since 1974, a tradition helping boost investor sentiment and demonstrating the health of Walmart’s business as it is continuously able to give back to investors each quarter.
Potential Investment Risks and Mitigations
- Increased Competition on Multiple Fronts: The retail industry is extremely competitive, with companies like Target, Kroger, Walgreens, Best Buy, CVS, Home Depot, and small businesses all attempting to get the same U.S. customers; abroad, other established retailers and small businesses compete heavily with Walmart; in e-commerce, Walmart intensely competes with companies like Amazon, Alibaba, and even Target. However, Walmart’s competitive advantages like their supply chain and extremely low prices provide an incentive for customers to continue shopping at Walmart no matter the macroeconomic conditions or competition faced.
- Environmental Concerns: By eliminating/reducing carbon emissions, Walmart may have to begin using more costly forms of energy to transport all of its products, maybe even forcing Walmart to raise prices or decrease their profit margins. This is a serious problem for Walmart, but we predict that this problem will be faced by its competitors too, as most of Walmart’s competitors have taken on the same pledge, somewhat mitigating the risk.
- Supply Chain Disruptions and Geopolitical Risks: Any tensions or regulation issues abroad Walmart could face in other countries would have massive impacts on their international sales, and as a result of geopolitical conflicts, Walmart’s supply chain could see major disruptions. Furthermore, if Walmart’s supply chain has issues, Walmart may need to hike the price of its products, reducing the number of price-conscious customers that would shop at Walmart and decreasing both their domestic and international sales. However, to mitigate this, Walmart’s supply chain is still incredibly durable and the risk of serious international conflict is still relatively low, which somewhat minimizes the supply chain and geopolitical risks.
Conclusion
Walmart still gives me the same joy it did when I was a kid, but now it’s no longer because of the cool bikes and where I got all my essentials; it’s because of the clear opportunity for a stable long-term investment with solid financials, an undervalued stock price, and a wide economic moat working in the company’s favor. Investing now and waiting for the company’s appreciation will be extremely profitable, which is why Walmart is one of my favorite investment opportunities right now to buy before it’s too late.
I am not a financial analyst; my articles are strictly for educational purposes. Please do thorough research before making any investment decisions. This article was inspired largely by the Young Investor Society’s Global Stock Pitch competition that I recently participated in. The prompt was to find a company and give it a buy, sell, or hold rating and to back your decisions with qualitative and quantitative analysis.
