Here's Why Walmart Won't Reclaim a $1 Trillion Market Cap Anytime Soon
Key Points
Walmart trades at a premium to Amazon and Target while delivering growth rates similar to the latter.
Online advertising revenue is already decelerating, and this is the main catalyst for Walmart to deliver profit margin expansion.
Walmart's low growth guidance for Q3 FY27 came before the Fed hiked rates, which can complicate growth moving forward.
Walmart (NASDAQ: WMT) reached a $1 trillion valuation earlier this year, but it has since drifted below that benchmark. It's pretty close, with a market cap above $850 billion, but investors shouldn't bank on Walmart reclaiming a $1 trillion market cap anytime soon.
Slow growth puts more pressure on the valuation
Although Walmart is the largest global retailer, it's also a mature company. The company has achieved only a 4% compound annual growth rate (CAGR) in revenue over the past decade. While revenue growth was a bit higher in Walmart's fiscal 2027 second quarter -- a 5.9% year-over-year growth rate -- it's still a sign of a mature company.
Missed AI’s "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we’re only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »
Earnings per share also dipped by 9.1% year over year. Walmart operates on low profit margins, which is common for retailers. Amazon, which trades at a 20 P/E ratio, achieves higher margins due to its cloud platform, and while Walmart has gotten into online advertising, it's still a small portion of total sales.
Slow growth puts more pressure on Walmart's 39 P/E ratio. Guidance only implies up to 3.75% year-over-year revenue growth in Walmart's fiscal 2027 third quarter, and that was before the Fed announced an interest rate hike. That rate hike, and the promise of another rate hike by the end of the year, can further slow Walmart's growth.
Image source: Getty Images.
A slowing advertising business casts doubt on future margin expansion
Walmart often runs a net profit margin of around 3%, and it followed up on that trend in the fiscal 2027 second quarter. The low-margin model of retail has been a headwind for Walmart stock rallies, and while online advertising has aimed to fix that, growth from this segment is already decelerating.
Walmart's global advertising business grew by 46% year over year in its full-year fiscal 2026. However, that same business was only up by 38% year over year in the company's fiscal 2027 second quarter.
The thesis for online advertising is that it doesn't need to be a large part of Walmart's business to boost profit margins considerably. However, if this same segment continues to decelerate, it may never become a large enough part of the business to have a sizable impact on margins.
It would be easier to overlook some of these concerns if Walmart had a 20 P/E ratio like Amazon or a 16 P/E ratio like Target.
Walmart's premium valuation over these companies may be harder to justify in future quarters, barring reaccelerated growth rates. That factor makes it difficult to see how Walmart can reclaim a $1 trillion market cap anytime soon.
Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Target, and Walmart. The Motley Fool has a disclosure policy.