Walmart's Stock Faces a 12% Plunge

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Walmart Inc. (WMT) shares may be poised to fall by nearly 12% based on an analysis of the technical charts, sending shares back to $73, levels not seen since July of 2017. Shares of Walmart are already down by nearly 25% from its highs made in late January when shares were trading at almost $110. (For more, see also: Walmart Inks Deal With Postmates for Deliveries.)

The retailing giant plunged in January after the company reported slowing e-commerce growth in its fiscal fourth quarter of 2018. Additionally, the stock has come under pressure since acquiring a control ling interest in India's largest e-commerce company Flipkart for $16 billion, and reporting its first-quarter results at the start of May.

WMT data by YCharts

Weak Technical Setup

Walmart's stock is resting on a critical support level around $81.50, and should the price of the stock fall below that support level, it could plunge by as much as 12% from its current price of roughly $82.75 to approximately $73. But, if the stock can stay above support at $81.50, it could rise back to roughly $88, an increase of 6.4%, where a wall of technical resistance waits.

The relative strength index (RSI) is attempting to trend higher, at a very gradual pace, but the longer-term, more powerful trend is declining. The RSI also never fully hit oversold levels falling below 30, and that suggests shares may have further to drop. Additionally, the stock price has been decreasing over the past few days on declining volume, which may indicate the numbers of buyers are beginning to thin out, and the sellers are taking control. (For more, see also: Walmart Employees Seem Happier.)

Slow Growth

Walmart stock currently trades at roughly 16.5 times fiscal 2020 forward estimates of $5.01 per share, which sounds cheap enough. Walmart’s earnings are forecast to rise about 4% in fiscal 2020. However, considering Walmart's earnings growth rate, and adjusting its valuation for growth, the stock trades at a one-year forward PEG ratio of over 4, making shares incredibly expensive. But to make matters even worse, since May 9, analysts have slashed their earnings outlook for fiscal 2020 by 4% from $5.23 per share, following the Flipkart acquisition and Walmart's fiscal first-quarter results.

WMT EPS Estimates for Next Fiscal Year data by YCharts

Margin Pressure

Margins have been pressured over the last few quarters as well, with both gross profit margins and operating margins falling to some of their lowest levels of the past few years. This presents another challenge Walmart is facing to reignite earnings growth.

WMT Gross Profit Margin (Quarterly) data by YCharts

A weak technical setup, a tepid growth outlook, and falling margins may all prove to be too much for Walmart’s stock to overcome.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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