Walmart Is Down 13% From Its High. Time to Buy?

Even as the world grapples with macroeconomic issues, most notably high inflation and rising interest rates, some things never change. People shopping at Walmart (WMT -0.08%) is one of them. 

The share price of the world's biggest retailer by revenue is down 13% from the all-time high it hit in April 2022. Is now a good time to buy shares in hopes of a rebound? Or is it a better idea to skip Walmart's stock right now? 

Recent developments 

In its fiscal 2022 (which ended Jan. 31), Walmart posted revenue of $611 billion, up 6.7% year over year. U.S. same-store sales, otherwise known as comps, were up 6.6%. E-commerce revenue in the U.S. increased by 12%, with the Sam's Club warehouse brand also growing sales by a double-digit percentage.

While Walmart's revenue increased at a healthy clip from an already massive base, macro headwinds are pressuring its margins. Its gross margin dropped from 25.1% in fiscal 2021 to 24.1% in fiscal 2022. It was the same story with the operating margin, which fell from 4.5% to 3.3%. Elevated costs for goods and higher supply chain expenses receive the blame. 

"During periods of inflation like this, middle-income families, lower-middle-income families, even wealthier families become more price sensitive," said CEO Doug McMillon on the Q4 2022 earnings call. Thanks to its price structure, Walmart should still be in a good position to perform well. For fiscal 2023, management expects revenue to rise by 2.5% to 3%, more in line with its historical performance.

Both sides of the argument 

In today's economic and market situation, there are some valid reasons for investors to consider adding Walmart to their portfolios. For starters, it's a stable, predictable, and durable enterprise that has been around for more than 60 years. The company's huge size allows it to continue offering low prices, and bargains won't ever go out of style, especially in a recessionary scenario. 

What's more, Walmart is a firmly profitable business, producing $11.7 billion of net income last fiscal year. Its risk of insolvency is nonexistent. At a time when investors are favoring dependable assets rather than speculative growth stocks, Walmart's bottom line looks attractive. 

The company's positive net income has afforded the business the ability to return excess cash to shareholders in the form of dividends. Impressively, Walmart has paid dividends since 1974, and it has increased those payouts every year. And because only 30% of operating income went to funding dividends in fiscal 2022, management has ample flexibility to keep pushing those payouts higher. 

On the other hand, skeptical investors can find some reasons to avoid the stock. While Walmart's huge scale is a competitive advantage, it's a disadvantage in that the company has limited reinvestment opportunities. Over the past 10 years, its sales have grown at a compound annual rate of 2.7% -- in line with U.S. GDP growth. There really doesn't appear to be much more room for it to expand in a way that outperforms the economy.  

Also over the past decade, Walmart's stock price increased by just 93%, well below the S&P 500's 152% rise. Its inability to beat the market during a time when asset prices had one of their best periods thanks to quantitative easing doesn't bode well for its future return potential.

The final piece of the bearish case for Walmart is its current valuation. As of this writing, shares are trading hands at a trailing price-to-earnings ratio of 33, which is more expensive than the broader market. And with a forward price-to-earnings of 23, Walmart's stock also trades at a premium to a competitor like Target. This discrepancy doesn't seem warranted given that over the past 10 years, Target grew its top line at a faster clip than Walmart did, and enjoyed higher average margins.

While there's no doubt that Walmart stock could provide a nice foundation to a portfolio and offers investors a steady income stream, I just don't see it as likely to generate sizable returns in the years ahead. As a result, even though shares are off 13% from their high, it's probably a good idea to pass on Walmart right now.