Where Will Walmart Stock Be in 1 Year?

Walmart (NYSE: WMT) is a bedrock of the U.S. consumer. And since consumer spending drives the U.S. economy, you could say that Walmart is a foundational staple for America, too.

The world's largest retailer is on pace to generate more than $650 billion in total net sales this (fiscal) year. Walmart is famous for its low prices, which even attracted higher earners in recent years as people seek savings amid a soaring cost of living.

The company's strong performance has translated to market-beating investment returns. Walmart outperformed the S&P 500 index for the past five years.

Can Walmart continue delivering at such a high level? Here is where the stock may trade in one year, based on some recent developments.

Image source: Getty Images.

The business is facing multiple headwinds

One reason Walmart has performed so well is that people tend to visit their local Walmart for their necessities, like groceries and household staples. Last year, groceries represented just under 60% of total sales in U.S. Walmart stores. That's going to buttress Walmart's sales, even during economic downturns.

However, that can only go so far. People, especially low-income consumers, are struggling financially. McDonald's Corporation emphasized this in its recent earnings call. As people look for ways to spend less, they are naturally going to cut back on discretionary purchases, which will likely weigh on all retailers, including Walmart, if things worsen enough.

There are some ongoing challenges facing consumers that could continue to pressure spending, including:

• The annualized inflation rate has ticked back up to 3% as of September's data.
• A prolonged U.S. government shutdown is putting pressure on federal workers' incomes.
• The potential impact of tariffs on the prices of imported goods that Walmart sells.
• Eroding credit across the U.S. as defaults rise on vehicles and student loans.

Any number of these factors could spell bad news for Walmart, as people will continue to cut back as household financial health worsens.

Walmart could struggle to justify its current price tag

If a slow economy does pressure Walmart's sales, it would come at an unfortunate time.

The stock's success over the past five years has steadily lifted Walmart's valuation. The stock has traded at an average price-to-earnings (P/E) ratio of 30 over the past decade, a lofty valuation for a mature company, but one that Walmart earned through steady growth and the consistent success behind 51 consecutive annual dividend increases.

But today, Walmart trades well above even that, at a P/E of 38. That's about a 26% premium to the average and puts the stock right below a P/E of 40, which it has rarely exceeded.

WMT PE Ratio data by YCharts

What does this mean? There is probably a higher chance of downside than upside moving forward, especially amid an increasingly harsh economic environment for Walmart's customers.

Where might the stock be in one year?

This is an educated guess, of course, but it shouldn't surprise anyone if the stock is trading lower a year from now.

The more pressing question could be how much the stock might drop.

You can see in the chart above that Walmart dropped to nearly 20 times earnings during the recession brought on by the COVID-19 pandemic. I'll admit that COVID-19 was a world-changing event that shocked the economy.

That said, consumer sentiment is ugly right now, so I wouldn't dismiss any possibilities. Wall Street analysts currently anticipate flat to slightly negative earnings growth for the current fiscal year. Using the company's trailing 12-month earnings per share of $2.65, here is how Walmart's stock price would look at various valuations:

Source: Chart created by author.

This doesn't change the fact that Walmart is a blue-chip stock, a world-class company. It's just hard to see the stock supporting this valuation much longer. The financial challenges facing Walmart shoppers will likely show in Walmart's share price sooner rather than later.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool has a disclosure policy.