Key Takeaways:
- The 2-Minute Valuation Model values Walmart stock at $106/share in 2 years.
- This implies that the stock could have nearly 20% upside from its current share price.
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Walmart’s stock has jumped nearly 75% over the past year, thanks to a big boost in its valuation as the market recognizes Walmart as a leader in the evolving retail landscape.
Walmart might look like an interesting company today, but it’s worth understanding that the stock has never been so expensive over the past decade.
Even if Walmart performs well as a business, the stock might not necessarily follow suit, especially if much of the company’s expected success is already reflected in its current valuation.
We like Amazon today better than Walmart. Find the best stocks to buy today on TIKR! >>>
What is the 2-Minute Valuation Model?
There are 3 core factors that drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
The 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized EPS, and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Why Walmart Could be Undervalued
Forecast
On Walmart’s Analyst Estimates tab shown below, you can see that analysts expect the company to grow revenue at a 2.5% compound annual growth rate, and normalized earnings per share, or EPS, is expected to grow a bit faster at 11.7% per year as Walmart’s net income margin rises:
View Walmart’s full analyst estimates >>>
For context, revenue grew at about 5.4% annually over the past 5 years, while EPS grew about 8.6% annually. Walmart is expected to see about the same growth rate going forward as in the past.
Valuation Multiple
Today, Walmart trades at around $90 per share, which means the stock trades at just over 1 times next year’s expected revenue and 34 times next year’s expected earnings.
The stock has averaged a 24x forward P/E multiple over the past 5 years, so the stock looks fairly expensive today at a 34x forward P/E multiple.
However, the business has seen excellent e-commerce and advertising success, and forecasts sales growth and margin expansion.
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We’ll use a 30x forward P/E ratio in our valuation. This is still a pretty hefty multiple, considering the company is expected to grow earnings at a hair over 10% annually.
Fair Value
3 years from now, analysts estimate that Walmart is expected to reach about $3.46 in normalized EPS. At a 30x NTM P/E multiple, that values Walmart stock in 2 years at $104/share. We can tack on $2/share in expected dividends to arrive at a final fair value of $106/share.
(The NTM P/E multiple uses the expected earnings for the next twelve months, so a 2-year valuation uses 3-year EPS forecast figures.)
With the stock trading at about $90 today, this implies that Walmart could rise 8.5% per year over the next 2 years, or 18% in total:
The returns look even more interesting if you believe that Walmart can sustain a 35x P/E multiple. This is certainly possible, because as a reference point, Costco trades at a 50x forward P/E multiple.
Analysts also think Walmart has a slight upside today.
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Analysts’ Price Target
The consensus analyst price target for Walmart today is about $98 per share, which means analysts think the stock has nearly 10% upside.
The blue line below shows analysts’ estimated upside for Walmart stock over the past 5 years.
When the blue line was high, analysts thought Walmart stock was undervalued. When the blue line was low, analysts thought Walmart stock was overvalued.
The black line simply tracks Walmart’s stock price, which you can see has risen quite dramatically.
You can see that analysts more or less pretty consistently thought that Walmart had about 10% upside over the past 5 years.
They didn’t see Walmart’s massive price move coming, because it was difficult to predict the P/E multiple expansion:
Analysts’ price targets can suffer from many biases and aren’t always accurate.
Still, analysts think Walmart stock has a slight bit of upside today.
TIKR Takeaway
Based on the 2-Minute Valuation Model, it looks like Walmart stock is just about fairly value today, and it’s possible that the stock could go up nearly 20% over the next 2 years.
This is, of course, just a valuation exercise. No one knows where a stock is headed in the short term, and few can predict where a stock is heading in the long term.
We like Amazon today better than Walmart. Find the best stocks to buy today on TIKR! >>>
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks and was built for investors who think of buying stocks as buying a piece of a business.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!
