Walmart (WMT) stock has had a rough few months. After hitting a 52-week high of $135.15 and briefly crossing the $1 trillion market-capitalization mark, the shares have been cut down hard. WMT opened at $102.63 on Friday, putting its market cap at around $816 billion and leaving the stock down roughly one-fifth from its May highs. A pair of earnings reports — one in May, one on August 20 — did most of the damage.

Two Earnings Reports Did the Damage

The first blow came with the Q1 report in May. Revenue was strong, up 7.3% year-over-year, but EPS guidance missed expectations and the stock dropped about 7% that day. The Q2 results landed on August 20, and the reaction was worse. U.S. comparable sales came in at 2.6%, well short of the 3.8% analysts had penciled in, and Q3 EPS guidance of $0.62 to $0.64 also fell below the $0.68 consensus. WMT dropped 9.2% in a single session, wiping out more than $80 billion in market capitalization.

The headline comp number, though, deserves some context. Regulatory changes to drug pricing created a drag on the health and wellness category. Strip that drag out, and comparable sales were closer to 3.4% — still a miss, but not the freefall the headline figure implied.

On the reported figures, Q2 was stronger than the sell-off suggested. EPS came in at $0.81, beating the $0.74 consensus estimate, and revenue hit $187.94 billion, above the $186.64 billion expected and up 5.9% year-over-year. Return on equity was 21.83%.

Digital Business Keeps Growing

While the comparable sales number grabbed the headlines, Walmart's digital operations told a different story. Global e-commerce grew 23% year-over-year, and U.S. e-commerce rose 24%. Marketplace sales jumped 52%, membership fee revenue climbed 17%, and store-fulfilled delivery grew 43%.

Advertising was the standout. Total advertising revenue grew 38% year-over-year, with Walmart Connect up 43%. Analysts estimate gross margins on the advertising business at close to 70%. Combined, advertising and membership fees now account for roughly one-third of Walmart's operating income, despite representing only a fraction of total revenue.

The model behind Walmart Connect is straightforward. Brands pay to have their products surface when shoppers search on Walmart's platform. A single customer can therefore generate both retail revenue at the checkout and advertising revenue from the brand that paid to reach them. That makes the ad business increasingly relevant as investors look for signs that Walmart can keep expanding beyond traditional grocery and general merchandise sales.

Valuation Still Stretched, But Less So

WMT is not cheap. At roughly 36x forward earnings, the stock trades well above the sector average of 15x and above its own five-year average of around 30x. Before Q1 earnings the multiple stood at 46x; before Q2 it was 38x. Two rounds of multiple compression have taken some of the pressure off.

Wall Street has not turned its back on the stock. Of the 32 analysts covering WMT, 29 rate it a Buy, and the average price target sits at $129.57, implying around 26% upside from current levels. Jefferies reaffirmed a Buy rating with a $120 target, while Guggenheim and Mizuho both set $130 targets.

On the insider front, EVP Daniel Danker sold 50,644 shares on August 26 at an average price of $105.35. The sale was made under a pre-arranged 10b5-1 plan to cover tax obligations related to vesting equity awards.

Source: CoinCentral