Walmart’s stock has certainly made headlines, especially following its spring 2024 stock split—the first in over two decades. Since that pivotal moment, shares of Walmart (WMT) have surged impressively from a 52-week low of $64.16 in May last year to a notable high of $105.30 in February. However, this upward trajectory hasn’t been without its hiccups. Economic uncertainties, intensified by the tariff policies enacted by former President Donald Trump, caused significant fluctuations in Walmart’s shares.
As one of the largest retailers globally, Walmart found itself in a challenging position, being compelled to pass on tariff-related price increases to consumers. Trump publicly criticized the company’s decision to increase prices, which resulted from these tariffs. Walmart CEO Doug McMillon acknowledged the pressure on retail margins: “We will do our best to keep our prices as low as possible. But given the magnitude of the tariffs… we aren’t able to absorb all the pressure.” Despite these challenges, the retail giant presents a compelling investment opportunity for the long term. Let’s delve into three key reasons why Walmart remains an attractive prospect for investors.
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The Expansion of Walmart’s E-Commerce Business
In today’s digital-first world, e-commerce is more important than ever, and Walmart is making considerable strides in this domain. As the largest retailer globally by revenue, Walmart reported an impressive 2.5% sales growth, amounting to $165.6 billion in its fiscal first quarter, which ended on April 30. This growth is especially commendable given the current economic climate.
Online sales have surged even higher, soaring by 22% year over year during the same period. This was a marked acceleration from the 16% growth experienced in the previous quarter, illustrating Walmart’s commitment to enhancing its digital shopping experience. Key to this expansion is Walmart Plus, a membership program which parallels Amazon Prime, offering free delivery and additional perks to encourage customer loyalty. The program has proven successful, resulting in a 15% year-over-year increase in membership income in Q1.
CEO McMillon emphasized the importance of this growth, stating, “It’s helpful that we’re crossing the threshold of profitability with e-commerce globally, and that we have these newer, higher-margin businesses growing like membership and advertising.” This pivot towards e-commerce is likely to deliver considerable returns for Walmart moving forward.
Walmart’s Advertising Strengths
In addition to e-commerce gains, Walmart’s advertising division has become a powerhouse, providing another robust reason for investors to consider Walmart. The company recorded an astonishing 50% year-over-year sales increase in its advertising business in Q1. This surge can be partially attributed to Walmart’s expansion into connected TV (CTV), allowing it to expose ads to consumers through one of the largest screens in their homes.
Walmart’s acquisition of television manufacturer Vizio marks a strategic step in this direction. McMillon noted, “This acquisition accelerates the build-out of our advertising platform into the connected TV business.” With forecasts indicating a rapid growth in the CTV ad market, this move positions Walmart to capitalize on newly emerging opportunities. Industry analysts predict that television advertising, which totaled $91 billion in 2024, will escalate to $98 billion by 2027, with CTV making up the bulk of that increase. Accordingly, Walmart’s advertising segments can absorb some of the implications posed by increased tariffs.
Robust Free Cash Flow Generation
Free cash flow (FCF) stands out as yet another pillar of Walmart’s financial health, signaling the company’s capacity to reinvest in its business, manage debt, repurchase shares, and sustain dividends. Having generated over $10 billion in FCF over the last three fiscal years, Walmart recently indicated a promising outlook, asserting, “[W]e believe our return on capital will improve over time.” The current fiscal year kicked off with a remarkable FCF of $0.4 billion, showcasing a dramatic turnaround from a negative $0.4 billion in the same period the previous year.
This strong cash generation capability allowed Walmart to raise its dividend by an impressive 13% in February, surpassing last year’s 9% hike, which was the largest increase seen in over a decade. Walmart has also maintained an unwavering track record, raising its dividend for 52 consecutive years—a testament to its financial stability.
On top of that, Walmart committed $4.6 billion towards share buybacks in Q1, representing the largest repurchase initiative in the past year. This proactive approach not only boosts shareholder value but also signals confidence in the company’s long-term prospects.
Walmart’s e-commerce growth, advertising prowess, and solid free cash flow positions the retail giant favorably in the stock market. Although investors may consider waiting for a price dip, implementing a dollar-cost averaging strategy could present a balanced method to gradually build a position in Walmart shares.
In summary, the current economic conditions may be challenging, but Walmart’s robust foundations and strategic moves indicate that it is well-prepared to thrive when the market conditions improve.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Robert Izquierdo has positions in Amazon and Walmart. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.
