Why did Walmart stock fall? In my view, the decline was deserved 📉 $WMT

Walmart shares dropped about 9% after the latest quarterly results. 📉 At first glance, that might seem odd – the company beat analyst expectations on both revenue and earnings per share and also raised its full-year outlook.

But if we look a little beneath the surface, the market reaction makes a lot more sense, in my opinion.

To some extent, I think this drop was deserved. Not because Walmart reported bad results. On the contrary, it remains a very high-quality company. The problem was more that the stock was trading at a fairly high valuation before the results, and the market expected almost perfect numbers.

📊 Results were not perfect

In the second quarter, Walmart grew revenue by 5.9% to $187.9 billion and adjusted earnings per share reached $0.81. Analysts had expected about $186.8 billion in revenue and $0.74 per share.

Another positive was the continued momentum in e-commerce, which grew more than 20%. 🚀 The advertising business grew as much as 38%. Walmart is gradually showing that it is no longer just a traditional retail chain.

But the problem came with comparable sales growth in US stores. Those rose only 2.6%, while analysts expected roughly 3.8%.

That may suggest the American consumer is becoming more cautious.

🔮 Investors were mainly disappointed by the outlook

Even more important than the results themselves was the outlook for the next quarter.

Walmart expects revenue growth of about 3% to 3.75% and adjusted earnings per share between $0.62 and $0.64. That outlook fell short of market expectations. And in my view, that is the main reason for such a sharp drop in the stock.

Investors don't buy stocks based on what a company earned three months ago. They buy them mainly based on what they expect in the future. Walmart showed good current results, but at the same time hinted at a slower growth pace going forward.

💰 A one-off factor also helped

Another thing I would watch is the quality of the beat.

Walmart benefited from tariff refunds, which positively affected operating profit growth. The company plans to use part of that money for price cuts and other price investments.

That's obviously good for customers and potentially for Walmart's long-term market share. But for investors, it raises the question of what the results would have looked like without this extraordinary benefit. 🤔

📉 And now the most important thing: valuation

In my view, Walmart was simply fairly expensive before the results.

It's a great company with enormous scale, a strong brand, and fast-growing segments like e-commerce and advertising. But even the best company in the world can be a bad investment if we pay too high a price.

And that's exactly where I think the problem was. The market had very high expectations going into the results. When the company then showed weaker US comparable sales growth and the next-quarter outlook wasn't that strong, investors started to reprice some of those expectations.

Walmart didn't report bad results. The stock fell mainly because at a high valuation, being just good is no longer enough. You have to be almost perfect.

🛒 Could Walmart be more interesting now?

And that's where I think the situation is starting to get interesting. 👀

After the drop, some of the high expectations have been priced out. Meanwhile, Walmart's long-term story hasn't fundamentally changed in my view.

The company is still growing, e-commerce continues at a very strong pace 🚀, the advertising segment is expanding rapidly, and management also raised the full-year outlook.

👉 So in my view, the roughly 9% drop was deserved, because the valuation was high before the results and the numbers themselves weren't strong enough to justify those high expectations.

On the other hand, after this pullback, Walmart is definitely more interesting than it was a few weeks ago. I'm not saying the stock is automatically cheap, but the balance between the company's quality and its price is starting to improve. 📈

If the price continued to fall, Walmart could gradually become a very interesting long-term buying opportunity, in my opinion. 💡

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