Walmart's Stock Is Down 19% From Its High. Is It Too Late to Buy or Right on Time?

Walmart (NASDAQ: WMT) has become the quintessential success story and has handsomely rewarded shareholders over the years. But even this venerable retailer's stock price doesn't go up in a straight line.

After closing above $134 in mid-May, the share price has dropped over 19% as of July 23. Market timing is typically an exercise in futility, since many things other than the company's long-term fundamentals can influence the share price. Still, it's useful to examine the stock's downdraft and measure it against the company's long-term growth potential.

Taking that into consideration, is this the right time to buy, or is more pain in store for shareholders?

Strong execution

It's hard to find a retailer that can undercut Walmart on price. It's been pushing its low-cost, everyday-low-price business model since the company opened its first discount store in 1962. Hence, it's gotten very good at operating the business, and it attracts 280 million shoppers every week.

Management has also invested heavily in technology to become an omnichannel retailer. Customers can shop at Walmart in multiple ways, including getting fast delivery at home. Walmart's ultra-low prices have clearly appealed to consumers, particularly during these challenging economic times when prices have been broadly increasing, including for gas.

The company's biggest sales generator, Walmart U.S., saw fiscal first-quarter same-store sales (comps) increase 4.1% for the period ended on April 30. Importantly, higher traffic contributed 3 percentage points, with increased spending representing the balance. Total revenue, excluding foreign-currency translation effects, grew 5.9%, and adjusted operating income increased 5.1%.

Image source: Getty Images.

Buying opportunity?

Walmart's sales improvement was partly due to gaining market share from rivals. Whether this can last when the economy picks up steam remains a question.

The company does have growth initiatives, such as advertising. This grew 37% year over year. Still, while it's a higher-margin business, it's unclear when this will significantly move the needle.

Walmart's stock price drop has resulted in a lower valuation, as measured by the price-to-earnings (P/E) ratio. Since mid-May, the P/E ratio has fallen from 48 to 39.

Still, I'd hardly call Walmart a value stock. The shares have a 10-year median P/E ratio of 31. It's also more richly valued than typical large-cap stocks, with the S&P 500 index currently trading at a P/E multiple of 28.

While many retailers have struggled in the recent economic environment, Walmart deserves kudos for growing sales. Still, its fast-growth days are likely behind it. With Walmart's P/E multiple, the market is pricing in high growth that it might be unable to meet.

Hence, I'd pass on Walmart's shares right now.

Lawrence Rothman, CFA 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.