This New Walmart Can Battle Amazon And Is Undervalued

This New Walmart Can Battle Amazon And Is Undervalued  | Dec 06, 2018 01:21

Looking at the stock price of the world’s largest retailer, it seems Walmart (NYSE:WMT) investors are confused about its future growth possibilities.

Every post-earning rally faded quickly and now that we’re almost done with 2018, Walmart has barely budged. One possible explanation for this dismal performance is that investors are still skeptical the big-box retailer can compete with (NASDAQ:AMZN), which is fast encroaching on its territory.

Walmart (WMT) 1-Year Chart

Other factors contributing to the stock’s sluggish performance include rising costs, U.S.-China trade battles and the uncertainty over the general direction of the markets and the economy.

But hidden beneath the cloudy outlook are some strong signs that show this retail giant is entering a strong growth period that will continue for several years.

That growth cycle has been fueled by the company’s massive investments in its online channels, its focus on cleaner and better-stocked stores and improvement in its offerings of groceries, which are key to its long-term success.

Online Sales Growth Justifies Splashing The Cash

The result of these efforts has been quite astonishing over the past two quarters. A turnaround in same-store sales that started in the third-quarter of fiscal 2015 has gained pace this year and there are good reasons to believe that it will continue in 2019.

During the past two quarters, Walmart’s e-commerce business has expanded by around 40%, a very impressive reading on a metric so crucial for the company’s long-term success.

That growth figure certainly justifies the company’s 2016 acquisition of e-commerce start-up, for $3.3 billion and the most recent deal to buy 77% stake in Indian unicorn Flipkart for $16 billion.

Walmart offers free, nationwide two-day shipping on thousands of household goods. It expects to be able to reach 40% of U.S. households with grocery delivery by the end of this year.

The company is quickly expanding its click-and-collect services, which are now available at 2,100 stores. That’s a serious challenge to Amazon, which offers pickup from Whole Foods in 22 cities.

No doubt this spending is pressuring the retailer’s gross margins and making investors nervous about the retailer’s acquisition-fueled e-commerce strategy.
But in our view, these initiatives will deepen Walmart’s online relationship with its millions of customers and attract millennials who have, so far, preferred Amazon and the eBay (NASDAQ:EBAY) for their online shopping needs.

In an uncertain macro environment when risks to economic growth are rising and high-growth stocks are losing their luster, Walmart is well-positioned to weather any potential storm.

With its strong online presence and its vast economic power to squeeze its suppliers for lower prices, the retailer offers a great hedge during the times of distress. That power was on display during the past six months, when Walmart massively outperformed the benchmark S&P 500 by rising about 12%.

Bottom Line

To some investors, Walmart stock is expensive at its forward price-to-earnings multiple of around 20x, but that concern ignores the fact the retailer isn’t the same company it was five years ago. With its e-commerce momentum and strong core brick-and-mortar operations, we believe its shares are undervalued and offer a good entry point to long-term investors.

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