The retail giant's share price has tripled in recent years.
A look back at the performance of Walmart's (WMT 1.18%) stock in the 21st century reveals some interesting trends. From 2000 to 2016, Walmart's stock rose in value by roughly 0%. That's a terrible return for a 16-year holding period. Then, suddenly, Walmart's stock price began to rise. Since 2016, shares have tripled in value. In the past 12 months, their 29% jump has narrowly outperformed the heady 27% rise of the S&P 500.
What caused Walmart's resurgence over the past eight years or so? More importantly, will this retail giant's stock continue to outperform?
Why Walmart stock spiked in value
One of the simplest ways to assess a gigantic company (it's the biggest retailer in the world by multiple metrics) like Walmart is by analyzing its price-to-sales ratio. In 2016, the market was only willing to pay 0.4 times sales for Walmart stock. The company was hugely profitable, but its sales had actually begun to decline. The stock's depressed price-to-sales ratio seemed justified given that Walmart's business seemed to be plateauing.
Fast-forward to today and the situation is much improved. Sales growth has averaged more than 5% year-over-year in recent quarters. With a return to growth, the market has assigned Walmart a more premium valuation. Today, shares trade at roughly 0.75 times sales -- nearly double its 2016 low.
WMT PS Ratio data by YCharts.
Will sales growth continue to rise?
Walmart's sales growth may have ticked up, but its profitability has gone in the other direction. Given the decrease in profitability, Walmart's price-to-earnings ratio has expanded more than its price-to-sales ratio. In 2016, shares traded as low as 14 times earnings. Today, they trade at nearly 32 times earnings.
In order for Walmart stock to justify this premium valuation, it must prove that it can continue to boost sales by 4% to 6% per year. The market, after all, seems willing to accept lower profitability in exchange for higher growth.
WMT PE Ratio data by YCharts.
Whether Walmart can sustain its current sales growth rates over the next three years depends on several factors.
First, can Walmart continue to grow its online sales?
With 10,623 stores worldwide -- down from 11,718 stores in 2018 -- Walmart is limited in how much it can expand physical store sales. A multi-year focus on e-commerce is a big reason why the company's sales growth has picked up. Last quarter, total sales grew by just 3.4% year over year, but e-commerce sales in particular grew by a brisk 17%.
Over the next three years, expect e-commerce to become an even bigger story for Walmart. After a big investment into next-gen distribution facilities across the country, the company is finally catching up to Amazon (AMZN -0.27%) in terms of automation and delivery speed. In fact, Walmart now commands a greater share of the e-commerce grocery market than Amazon, a reversal versus previous years.
The second factor that will influence Walmart's sales growth future is its ability to further grow its international channels.
Last quarter, international sales reached $32.4 billion, a 17.6% growth versus the year before -- an even greater growth rate than its e-commerce segment! Unlike its domestic market, Walmart actually has room to expand its store count abroad, opening 110 new stores last quarter alone.
Over the next three years, expect international sales to become an even greater part of the Walmart story, especially in places like China where quarterly sales growth has reached as high as 25%.
Last year, international sales comprised around 17% of total sales. This year, they comprised nearly 19% of sales. It will take time for international sales to become a driving piece of the Walmart story, but the trends are hard to deny. In fact, Walmart management has an ambitious goal to double international sales over the next five years.
Where will the stock price be in three years?
Walmart as a company should do quite well in the coming years. Investments in new sales channels like digital advertising and an improved ability to compete in the crowded e-commerce market have put a dent in profitability. But these efforts have also reinvigorated Walmart's sales growth. The company continues to be aggressive on this front, most recently acquiring Vizio for $2.3 billion, which could provide Walmart with unprecedented access to Vizio's customer base, plus an increased ability to sell higher-margin products and services to smart TV watchers.
Whether the stock price will benefit is another story. Now trading at 32 times earnings, Walmart shares appear overpriced for a business growing revenue by just 5% per year. Amazon stock, for comparison, trades at roughly 60 times earnings. That's twice as expensive on a price-to-earnings basis, but Amazon's quarterly revenue growth rates are nearly three times that of Walmart.
If markets, in general, remain strong over the next three years, and Walmart maintains its current valuation multiple, expect the stock to return between 5% to 10% per year -- roughly what the company has been able to grow earnings by in recent quarters.
The biggest risk, however, is whether the current valuation multiple is truly sustainable. The story three years from now will likely have more to do with how the market is valuing Walmart stock than how the company is performing at its core.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool has a disclosure policy.
