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If Walmart Does This One Thing, the Stock Will Soar

By Jeremy Bowman - Mar 25, 2021 at 7:06AM

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Shares of the retailer could be on the verge of ripping higher.

Walmart (WMT -0.58%) is the world's biggest retailer and the biggest company by revenue.

As a business, it's one of the best in the world, generating $22.5 billion in operating income. But the stock has only had middling results in recent years, despite the impressive growth in its e-commerce business and moves like its 2018 acquisition of Flipkart, the largest e-commerce business in India. Over the last three-year and five-year intervals, Walmart has only matched the S&P 500, even as the company has delivered consistent comparable sales growth, gained market share, and ramped up its e-commerce business.

As a stock, the biggest challenge it faces is its perception. Investors mostly seem to think of the company as a mature, even stodgy, retailer that is so big that it can only grow slowly. The rise of Amazon, now seen as the dominant retail business, has also weighed on the investor view of Walmart as the thousands of supercenters that anchor the business have become something of a liability in the e-commerce era. However, Walmart has a plan to change that.

A Walmart truck on the highway

Image source: Walmart.

Walmart flips the script

At the company's recent Investor Community Meeting, management detailed the ways it is diversifying its business away from brick-and-mortar retail into services like healthcare, advertising, and fintech, as well as e-commerce services like its third-party marketplace and fulfillment. None of those ventures would be possible without the strength of its brick-and-mortar business, however.

The announcement is an expansion of a strategy that has already been in place for years. Walmart essentially stopped opening new stores three years ago and has used the capital that would have gone to new stores to invest in its omnichannel business, building out grocery pickup stations and delivery infrastructure, improving its supply chain, and adapting its supercenters to support e-commerce.

Walmart management sees its stores as the centerpiece of a much broader business that reaches a number of other industries outside of retail. For example, Walmart now has 20 health clinics in its stores, which take advantage of the company's huge customer traffic, and of its having stores within 10 miles of 90% of the U.S. population. In addition to being the country's largest retailer, Walmart is also the biggest grocer, which is a frequent traffic driver and what CEO Doug McMillon described as a natural complement to healthcare, especially in areas like wellness.

Similarly, McMillon said that customers have asked the company for more financial services, another area where it can leverage its relationships with customers who are unbanked or underbanked. This is why the company partnered with Ribbit Capital, a backer of Robinhood and Coinbase, in January to launch a new fintech start-up.

Finally, the company sees increased opportunities and advertising as it leverages its digital real estate and valuable data, following in the footsteps of Amazon, which built a $20 billion digital advertising business in less than five years. Walmart U.S. CEO John Furner predicted that the company would easily become one of the top 10 advertising platforms five years from now, ahead of media companies like TwitterFox, and Hearst.

Walmart's most important push into services may be in e-commerce as it builds out its marketplace and fulfillment business, again following Amazon's strategy in leveraging its direct sales business to generate higher-margin revenue from services. Its global e-commerce business could reach $100 billion in revenue in two years and $200 billion a few years after that.

How success will be determined

Though Walmart has performed well during the pandemic as a consumer staples company selling vital products, it has actually underperformed the S&P 500 since the start of 2020, indicating that investors aren't giving it credit for its performance during the crisis or its pivot to services. 

However, there are precedents for such a shift in perception. Legacy automakers, for example, were long laggards on the market, but Volkswagen (VWAGY 0.76%) shares recently took off after the company projected it would sell 1 million electric vehicles this year, topping market darling Tesla. Other automakers like General Motors have also seen their shares rise as investors have recognized their investments in new technologies like EVs and autonomous vehicles.

Similarly, Disney (DIS 1.63%) shares have surged as its new streaming service, Disney+, has already gotten more than 100 million subscribers around the world. As a result, the company is being valued like a high-growth streaming business rather than a low-growth legacy media business, and the stock has reached an all-time high even as its theme parks business has been crushed by the pandemic.

For Walmart then, the challenge it faces is convincing the market that it is a different kind of company than it's historically been. McMillon said as much at the conference, saying: "We aren't the business we were just a few years ago, and we aren't the business you'll see in the years ahead; we're moving." 

What will make the stock soar is if the company can change the market's perception to recognize its shift to higher-margin services and growth industries like e-commerce and value it accordingly. At this point, Walmart may not have made enough progress to deserve that recognition, but it should eventually get there.

Management said that it would gain operating leverage after making investments this year, predicting it would gain at least 20 basis points a year in operating margin and grow organic sales by at least 4%. That forecast doesn't seem to take into account the emerging businesses, which are too small to have an effect on the bottom line. 

Investors will have to watch to see if other new ventures like healthcare and financial services pay off, but eventually Walmart should get credit for the changes it's making to its business model. Volkswagen, for example, is already up 70% year to date, while Disney has doubled the returns of the S&P 500 since it announced Disney+ two years ago. 

Walmart stock looks ready for a similar surge.

  

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$123.41 (-0.58%) $0.72
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$103.25 (1.63%) $1.66
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,134.22 (2.51%) $52.22
Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$657.78 (4.72%) $29.62
General Motors Company Stock Quote
General Motors Company
GM
$35.98 (2.20%) $0.77
Volkswagen Aktiengesellschaft Stock Quote
Volkswagen Aktiengesellschaft
VWAGY
$19.87 (0.76%) $0.15
Twitter, Inc. Stock Quote
Twitter, Inc.
TWTR
$37.15 (3.87%) $1.39
Fox Corporation Stock Quote
Fox Corporation
FOX
$30.75 (2.52%) $0.76

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