Is Walmart A Buy – As It Preps Its “Amazon Prime Killer?”
Walmart’s been a force of nature for 58 years now.
Since its founding in 1962 in Arkansas the company grew to dominate retail in the next few decades as it still does today.
In the last 58 years it overtook and then crushed competitors like the now defunct Kmart with its superior business model and efficiencies to offer continually lower and better prices to consumers.
It still dominates brick and mortar retail to this day… But it didn’t focus on its online efforts and Amazon surpassed it.
But Wal Mart isn’t done in this fight to dominate online retail and people’s wallets.
Over the past several years Walmart’s began competing better with Amazon via its online offerings once it focused its competitive advantages to this arena.
And now its taking a direct shot at Amazon by announcing the upcoming release of its “Amazon Prime Killer.”
The leak of this announcement came out on July 7th, 2020 and sent shares up as much as 6.4% on the day.
But should you buy Walmart stock now?
Before I answer that I need to show you what its shares did in the past.
Why Walmart’s Stock Rose 189,240% in 48 Years.
If you invested $10,000 in 1972 when Walmart IPO’d on the stock market and held its shares until today through the various share splits and dividends your shares would now be worth $18,924,000.
This is an increase of 1,892X or 189,240% in 48 years.
Without reinvesting the dividends.
If you reinvested your dividends this number would be much higher but couldn’t figure this number out due to the stock splits and dividends going back decades.
To say Walmart’s done well since its founding is a gigantic understatement.
In this time its shares rose from a split adjusted $0.067 per share to $126.41 per share as of this writing on July 7th, 2020.
This makes sense of course.
Walmart helped transform retail as we knew. And it’s become so powerful over time that its transformed how entire cities develop.
In the last few years as Amazon overtook Walmart as the world’s largest online retailer, Walmart began fighting back and competing with Amazon well.
And yesterday it announced the release of its “Amazon Prime Killer” coming out in July to compete even more directly with Amazon.
According to early reports this service “will cost $98 a year, and include perks like same-day delivery of groceries and general merchandise, discounts on fuel at Walmart gas stations, and early access to product deals, according to the "multiple" insider sources who spoke with Recode.”
Recode first announced this information that looks like it “leaked” directly from Walmart sources.
This Amazon Prime Killers is an almost exact copy of Amazon Prime which is great news for consumers.
But its also great for Walmart too.
Because as of January 2020 Amazon said it generated $17.8 billion a year in revenue just from Amazon Prime.
Walmart is looking to get a piece of this pie too. And this service should help add profits and cash flow to its bottom line.
This is a great move for Walmart… But I don’t recommend you buy stocks based on future potentials.
I recommend you buy stocks based on their fundamentals. So, do Walmart’s fundamentals make it a buy today?
Should You Buy Walmart Stock?
Let’s do a quick rundown of Walmart’s profitability and cash flow now. Because profits and cash flow drive the long-term value and pricing of a stock over time.
I measure this by looking at two important metrics.
Operating profits and free cash flow/sales (FCF/Sales).
On an operating profit basis Walmart’s produced an average operating profit margin of 5.1% per year on average every year of the last decade.
I look for any company to produce above 10% margins on a consistent basis to consider as an investment.
This falls below my threshold of what I look for to consider for investment.
What about FCF/Sales?
Over the last 10 years Walmart’s averaged 3.1% per year over the last decade.
I look for any company to produce above 5% margins on a consistent basis to consider as an investment.
Again, this falls below my minimum threshold to consider an investment.
Both are important because they help show you the profitability of the company.
The more profitable a company is the higher its value goes over time. And the more money it can spend on innovations and serving customers.
Walmart’s numbers are below my minimum thresholds… What about its valuation?
Its current P/E ratio is 22.6. And its current P/CF is 11.8.
I look for companies to sell at ratios below 20 to consider the investment undervalued based on these metrics.
So according to its current valuation its about fairly valued to slightly undervalued.
I also look at a ton of other metrics and valuations when evaluating a potential investment. But what it boils down to for me is right now Walmart is performing well. But it’s not earning enough in profits and its not undervalued enough for me to recommend to you right now.
Does this mean I expect Walmart stock to crash in time? No.
It means it doesn’t meet my specific and extremely strict criteria to recommend you buy it today.
It will continue to perform well over time. And with its new launch of its Amazon Prime Killer it may earn higher profits and cash flow by better competing with Amazon for the online dollar spend.
But I don’t recommend you buy on ifs and mays.
I need certainty to recommend you buy something.
And while I believe Walmart will continue performing well into the future… I’m not certain due to its low profits and cash flows combined with its fair valuation that it’s the best way to invest your money now.
If you’re looking for some potential stocks to consider buying use the following links to some of our recent articles.
Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.