Is It Too Late to Buy Walmart?

You probably associate the name Walmart (NASDAQ: WMT) with a good bargain. That's because this retailer focuses on offering shoppers the lowest prices possible on everything in its stores -- from groceries to a variety of essentials and general merchandise. That's been one of the keys to the company's success.

But one thing may not be the biggest value right now, and that's Walmart stock. It's climbed more than 150% over the past three years, and even amid this year's stock market turbulence, Walmart has held up, rising about 9%.

So now it's logical to ask: Is it too late to buy Walmart stock? Let's find out.

Image source: Getty Images.

A stock investors love

First, a bit about why Walmart has been such a popular investment choice in recent years. This is due to the company's fantastic business model, offering shoppers the lowest prices on a wide variety of items to keep them coming back. And Walmart has established e-commerce strengths too, to reinforce the convenience of turning to this retailer for all of your shopping.

This has helped revenue soar over time. But, since Walmart aims to offer customers value, its profitability on goods sold isn't high. That's OK, however, since Walmart's margins are higher in other areas, such as the selling of memberships and advertising. All of these elements contribute to the Walmart growth picture.

WMT Revenue (Annual) data by YCharts

Growth in two key areas

And what's encouraging is that membership and advertising are generating significant growth. In the recent quarter, membership fee revenue advanced 15%, and the global ad business grew 37%. Membership gains show customers intend to shop regularly at Walmart, and this should result in sales increases over time. These fees, as well as the advertising opportunities Walmart offers to brands, don't cost the company much, so they contribute nicely to profit.

It's no surprise that investors have rushed to get in on Walmart stock: The company offers investors stability, as it sells essentials, as well as growth thanks to the membership and advertising businesses.

But the gains in Walmart stock have also pushed valuation higher. Today, the stock trades for about 41x forward earnings estimates, near its highest level over the past three years.

Walmart is firing on all cylinders, and I wouldn't expect that to stop, particularly in an environment where consumers are worried about the economy. In such situations, they are likely to continue shopping at stores that offer them value -- and essentials. That's a reason why Walmart stock has outperformed the market so far this year, as customers have worried about economic growth and the pace of interest rate cuts.

But is it too late to buy Walmart at today's valuation? I wouldn't say "too late," but at today's price, Walmart stock isn't as much of a bargain as the items in its stores. I would keep the stock on my watch list, though, and consider buying on a dip.

Adria Cimino 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.