Walmart (WMT) shares soared after the company announced its new subscription service as it tries to become more like Amazon (AMZN). Whether the move helps Walmart is yet to be seen. It doesn’t change the fact that stock is not cheap and trading at historically high valuations.
It is prompting some to bet that the rally doesn’t last and that Walmart shares fall 7% or more by the middle of November. It means the stock would give back all of its post-earnings gains. You can track all of my Seeking Alpha stories on this Google Spreadsheet.
Whether the subscription service pays off for Walmart is yet to be determined. The actual offer doesn’t seem to be much of a needle mover for the overall company. Even if Walmart were to capture 100 million users of the product, at $98, it would amount to $9.8 billion in added revenue for the company, which, don’t take this wrong, is a lot of money, but represents less than 2% of Walmart’s estimated revenue of $550 billion in the calendar year 2021. How much of an actual sales boost it will bring to the underlying business is the big question, and that is yet to be seen.
More bizarrely is Walmart’s pursuit of TikTok. Perhaps, there is something they can do with advertising on the platform and bringing some of those users over to their platform. But this sounds like it would be done with Microsoft (NASDAQ:MSFT), and it is not clear what the exact drivers for growth would be for Walmart.
To this point, analysts have not modeled in significant revenue gains for the business based on estimates. Currently, analysts see revenue climbing to $571.8 billion in fiscal 2023, up from a prior forecast of $570.3 billion in June. Meanwhile, earnings for the company are forecast to reach $6.26 per share in fiscal 2023 from previous estimates of $5.86 in June.
Walmart trades at 26.4 times fiscal 2022 earnings estimates, which is the highest the earnings multiple has been since 2002. Over the last 20 years, the stock has traded with an average P/E ratio of 17.5. It makes the stock grossly overvalued. For comparisons, Facebook (NASDAQ:FB) trades with a 29.2 one-year forward P/E and offers investors a much better growth profile.
It could be why some traders are betting the significant gains don’t hold. The open interest levels for November 20, 2020, $150 puts rose by 12,600 contracts on September 2. The trader bought the puts for around $13.10 per contract. It means the stock would need to fall to about $137 per share to breakeven if holding the puts until the expiration date.
Overall, the stock’s significant gains seem more like excitement, which may not justify the outcome. Of course, the momentum in this market is powerful, and just having that momentum is enough to keep any stock running higher.
A Walmart pullback would not come as a big surprise.
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