Walmart shares edged higher in early Wednesday trading following a bullish outlook for the world's largest retailer ahead of its fourth quarter earnings report later this week.
The world's largest retailer, which continues to take a larger share of higher-income consumers as it focuses on keeping prices lower and improving e-commerce delivery, has firmly outperformed the broader market, and many megacap tech stocks, over the past two years.
Walmart shares have more than doubled since spring 2023, while adding more than $400 billion in market value, following the launch of an overhaul of its supply-chain costs with a focus on improving profit margins in its grocery and general merchandise businesses.
The retail giant is also quietly growing a set of alternative revenue streams, outside its main sales drivers, which are producing wider profit margins and faster overall growth.
Walmart's e-commerce division is part of that focus, as is its nascent advertising business, its membership program, and its Walmart Marketplace offering, which like Amazon (AMZN) Marketplace enables third-party sellers to offer their wares on line.
Financial services and fulfillment services are also included in the so-called flywheel of alternative revenue streams, named so because of their self-perpetuating impacts.
Image source: Jeff Schear/Getty Images for Walmart
Morgan Stanley analyst Simeon Gutman argues, in a note published Wednesday, that those alternative revenue streams may have "more operating leverage than the market appreciates" to drive growth in margins and profit.
Walmart's alternative-revenue flywheel
That topic, in fact, was part of the conversation CEO Doug McMillon held with analysts and investors following Walmart's third quarter earnings report in November.
McMillon said the level of reinvestment in the alternative streams remained a "real-time conversation" for the world's biggest retailer.
"We think we are investing the right amounts, obviously, but it is a fluid situation," McMillon said. "We watch price gaps. We watch what's happening in the employment market and have freedom now to be able to make different investments if we want to.
"So, I think from a kind of an income-statement point of view, I feel like we're being appropriately aggressive," he added.
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Morgan Stanley's Gutman, who reiterated his 'overweight' rating and $115 price target on Walmart ahead of Thursday's earnings report, says more investment could propel margin growth beyond his bullish estimate of around 12%.
"Walmart has much more optionality than perceived," Gutman said "It could choose to reinvest at an even faster rate or flow profit to the bottom line."
"While this doesn’t change our view on medium-term earnings-growth potential (as we can’t predict how much Walmart will reinvest profits over time), it gives us more confidence in its ability to execute the alternative flywheel that the market is underappreciating," he added.
Walmart grocery and general sales still growing
Walmart's legacy operations are also performing incredibly well, with the group lifting its sales and profit forecast for a third time last autumn amid improving consumer spending and better store traffic.
The group estimates that net sales for fiscal 2025, which ended in January, rose 4.8% to 5.1%, with adjusted earnings in the region of $2.42 to $2.47 a share.
For the three months ended in January, analysts estimate Walmart will post a bottom line of 64 cents a share, or around $11.12 billion, with revenue rising 3.8% from a year earlier to just over $180 billion.
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Morgan Stanley's Gutman says the alternative-revenue component of Walmart's growth will "contribute roughly half of enterprise sales growth and nearly all the margin expansion."
As a result, Gutman lifted his bull case price target for Walmart stock by 15%, to $153 a share.
"Walmart is clearly capable of integrating technology that drives efficiency," he said. "It is no coincidence Walmart's multiple has been rising [currently about 37.5 times next 12 months price-to-earnings] as the market starts to sense what our model proves."
Walmart shares were last marked 0.07% higher in early Wednesday trading and changing hands at $103.85 each, a move that would nudge the stock's year-to-date gain to around 15.4%.
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