Walmart Is at $108. Here's Why Investors Should Take Pause.

Walmart (NASDAQ: WMT) has surprised investors. In the past five years, the share price has climbed 129% (as of July 23). If you can believe it, this outstanding performance is better than the gains posted by its two biggest industry peers, Amazon and Costco, over the same time period.

This popular retail stock trades at $108 as of early afternoon on July 23. Investors shouldn't rush to buy shares. It's best to pause.

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Expectations are currently high

Valuation expansion did play a part in lifting Walmart's stock price. Exactly five years ago, shares traded at a price-to-earnings (P/E) ratio of 33.1. Today, this has expanded to 38.1.

The market has started to appreciate the business more. It makes sense why. Walmart's diluted earnings per share (EPS) soared 107% from Q1 2022 to Q1 2027 (ended April 30). In the five-year period prior to this, that bottom-line figure was flat.

But the expectations investors have now are simply too high. Walmart's valuation represents a sizable 49% premium to the S&P 500 index.

And the valuation is more expensive than a dominant technology company like Alphabet, which is reporting much faster profit growth. It also has durable competitive advantages.

Walmart's EPS is projected to rise at a compound annual rate of 12% between fiscal 2026 and fiscal 2029. For a company that collected $176 billion in net sales in its latest fiscal quarter, a massive sum, this is a healthy outlook. It doesn't justify paying 38 times trailing-12-month earnings, however.

Buy shares only if this happens

The current setup, which should force investors to take pause, doesn't mean Walmart is off-limits for good. Here's where patience comes into play. Adding this retail stock to your watch list is the best thing to do right now.

At the right price, this high-quality business becomes more interesting as a potential portfolio addition. Walmart has a wide economic moat that stems from its tremendous scale advantage. It's able to secure merchandise at favorable costs. This supports permanently low prices, which keep attracting shoppers of all income levels.

In recent years, Walmart has found success generating new revenue streams. It's driving greater e-commerce sales. And its Walmart+ membership, a direct rival to Amazon Prime, brings in recurring subscription revenue.

Every single investor perceives value differently. In my view, should Walmart's P/E multiple fall to around 25, it would make for a very attractive buying opportunity. There's no telling if this will happen, though.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.