Can a transition towards an AI future boost Walmart’s stock price?

Walmart, is traditionally viewed as a stable but unexciting stock, but it could be on the brink of transformation. With AI-driven efficiencies, a booming e-commerce arm, and a growing marketplace, Walmart is positioning itself to be more than just a retail giant. Could this be the right time to re-evaluate Walmart’s potential in your portfolio?

Two of the biggest events of the year have come and gone in recent days, as a result of which we now have the prospect of a new US President and administration to look forward to in 2025 and we have had confirmation that the Fed’s plans to reduce interest rates remain in place, even if some of its personnel might be subject to change under President Trump.

US equity markets jumped sharply higher on what amounted to a Republican “clean sweep” and though not all of the gains can be directly attributed to the election, because, we are still in earnings season. The election result was certainly a big factor in the bullish sentiment that was on display.

If we look at the S&P 500 there are almost 200 constituents that have posted gains of +5.0% or more over the last 5 trading days.

The index itself has risen by +4.69%, as of the close on 07/11/2024, with the Nasdaq 100 adding more than 6.0% over the same period.

The best-performing sectors in the US over the last week have been Consumer Discretionary and Information Technology, which have risen by +8.87% and +6.45% respectively.

However, all four of these were almost eclipsed by the S&P 600 Small-cap index which rallied by +8.42% more on which later.

However, today I want to look at a stock that hails from what we would have to regard as an underperforming sector, namely Consumer Staples, which barely moved the dial over the last week, rallying by just 0.37.

Walmart Inc, WMT US, the world’s largest retailer

The company has a market cap of $670.0 billion, it employs more than 2.0 million people and operates from more than 10,500 stores across North America.

Walmart captures some 7.30% of all US retail spending, 21.0% of the Consumer Packaged Goods market, and 37.0% of all US grocery spending.

Its turnover is more than $648.0 billion per annum, and revenues at the business have grown by 26.0% over the last 5-years, whilst earnings have grown by an impressive 35.0%.

Those numbers look even better when you consider that its profit margins are around 2.40%. I also note that the company has grown its dividend by 10.00% in the last five years as well.

Walmart has traditionally been seen as a defensive stock, one that’s dependable and unexciting. However, I think the company is going through a transition and it’s one that could change its valuation and the way that investors perceive it.

Walmart, AI & marketplaces

Well, Walmart isn’t just a bricks-and-mortar retailer, it also has a significant online and e-commerce operation which has a turnover of more than $100.0 billion, and, has experienced six consecutive quarters of double-digit growth, according to analysts at Goldman Sachs.

As part of this operation, Walmart operates a marketplace for third-party sellers, who can utilise Walmart’s fulfilment and logistics capabilities.

The growth of Walmart’s marketplace should open up additional revenue streams for the business from listing fees, advertising and fulfilment.

Exciting as that prospect is it’s not the biggest opportunity that confronts the firm because that’s AI

Walmart believes that AI can help it grow its business by freeing up staff from mundane tasks as well as helping to automate the supply chain, and in the implementation of customer incentives and offers. What’s known as Hyper Personalisation, both online and in-store.

Investment bank Jefferies believes that AI could generate an additional $20.0 billion in revenues and $7.0 billion of additional cost cuts by 2029.

It’s also forecasting an additional $10.30 billion in advertising revenue from Walmart marketplace by 2029.

That additional turnover will form part of Walmart’s push to add $130.0 billion of turnover by 2029.

WMT Share price performance

Walmart’s share price has risen by +59.56% over the year to date and by more than +79.0% over the last two years and stands at $83.85.

That means it is trading on a forward PE ratio of 34.33 times, more than twice that of rival grocer Target TGT but well below that of wholesale discounter Cost CO COST US, which trades on a forward PE of 50.0 times.

If we look at Walmart’s biggest rival in the e-commerce market, Amazon, AMZN US we find that it trades on 38.10 times earnings but has a profit margin of around 5.29%.

So the question is can Walmart leverage higher margins from it’s market place, and the cost savings and new initiatives offered by AI to boost its profits?

The business is super tanker so these changes won’t happen overnight, but if it can reach its goals and do so in an ongoing and incremental fashion, then, they could genuinely transform the business.

The company will report its latest earnings on November 19th