What's Wrong With Walmart Stock?

Walmart (NASDAQ: WMT) reported earnings in May, and while the business did well, the stock has been sliding in recent weeks, down around 8% in the past month. Its valuation has now fallen below $1 trillion, although the stock remains in positive territory for the year.

For what's been a fairly safe investment to hang on to, it may be a concerning situation for investors. What's behind the sudden bearishness? Could this be a good time to buy the top retail stock on the dip, or could there be greater headwinds looming?

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The market may be more worried about what lies ahead

When Walmart reported earnings last month, its growth was impressive, with its revenue rising by more than 7% and its operating income also growing by 5% for the period ending April 30.

But investors are likely worried about how the business will perform amid rising oil prices due to the ongoing conflict in the Middle East and worsening economic conditions; consumer sentiment has been falling, which may impact demand in future quarters.

Walmart's management tried to address those concerns on its latest earnings call, with Chief Financial Officer John David Rainey stating, "While there are certainly pressures on the consumer, let me reiterate: our business is strong." The market is clearly not convinced that the business is in tip-top shape, especially with its earnings results not beating analyst expectations on the bottom line in the most recent quarter.

The stock's valuation could make it difficult for it to rally

Shares of Walmart are up over 7% this year, but the problem is that the stock isn't cheap these days. It's trading at more than 40 times its trailing earnings, which is a steep multiple to pay for a retailer that's generating single-digit growth, and which may encounter greater headwinds in upcoming quarters if consumers cut back on spending. By comparison, the average stock in the S&P 500 trades at only 26 times its earnings.

Although Walmart's business may indeed be fine, especially over the long run, that doesn't mean the stock itself is a good buy. At a high valuation, investors are pricing in significant future growth, and if reality doesn't align with those expectations, a correction may be inevitable. That's why I believe the stock may fall further as the year goes on, as its valuation has become inflated in recent years. At its current price, I just don't think it's a good buy.

David Jagielski, CPA 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.