Walmart's Stock Surge: Can High Expectations Derail the Retail Giant?

Walmart Inc. (WMT) has been on a tear, with its stock price more than doubling in the past three years. The retail giant's strong financial performance, prudent forecasting, and ongoing share gains have analysts bullish on the company's prospects. However, some analysts caution that high expectations could potentially derail the rally. Let's dive into the factors driving Walmart's stock surge and the risks associated with analysts' high expectations.

Walmart's recent rally can be attributed to several specific factors:

1. Strong Financial Performance: Walmart reported strong third-quarter FY25 results, with sales of $169.6 billion beating estimates, adjusted EPS of $0.58, and global eCommerce sales up 27%. The company raised its FY25 guidance for adjusted EPS to $2.42-$2.47 and sales growth to 4.8%-5.1%.
2. Prudent Forecasting: Despite consistent outperformance, Walmart maintains a prudent forecast, which has contributed to investor confidence. Analysts like Christopher Horvers from JP Morgan have praised the company's cautious approach while still expressing a bullish outlook.
3. Structural Profitability Improvements: Walmart's strong U.S. and international gross margin trends drive structural profitability improvements. The company's re-engineered supply chain, enabled by greater use of data, intelligent software, and automation, improves in-stock, inventory accuracy, and flow, enhancing customer engagement and trust.
4. Ongoing Share Gains: Walmart continues to gain market share, attracting younger and higher-income customers. The company's investments in people-led technologies, automation, and omnichannel growth strategies have helped it retain these customers despite inflationary pressures.



However, high expectations also come with potential risks:

1. Disappointment and price correction: If Walmart's actual performance fails to meet or exceed these high expectations, investors may be disappointed, leading to a sell-off and a correction in the stock price.
2. Valuation concerns: With the stock price rising significantly, there may be concerns about the company's valuation becoming too high. This could make the stock less attractive to investors, especially if the company's fundamentals do not support the elevated price.
3. Market volatility: High expectations can also lead to increased market volatility, as investors may quickly buy or sell the stock based on short-term news or earnings reports. This volatility can create opportunities for traders but also exposes the stock to greater price swings.
4. FX headwinds and limited SG&A leverage: As mentioned by Christopher Horvers, the analyst from JP Morgan, Walmart faces FX headwinds and limited SG&A leverage. These factors could potentially impact the company's performance and stock price, despite the analysts' bullish outlook.

In conclusion, Walmart's recent rally can be attributed to its strong financial performance, prudent forecasting, and ongoing share gains. However, investors should be aware of the potential risks associated with analysts' high expectations, such as disappointment, valuation concerns, market volatility, and operational challenges. By monitoring the company's performance and fundamentals, investors can make informed decisions about their investments in Walmart.