The financial landscape is buzzing with anticipation as Walmart prepares to announce its fourth-quarter earnings report. Analysts predict significant growth for the retail giant, expecting revenues to hit a staggering $179.25 billion, marking a 3.4% increase compared to the previous year. Per-share earnings are projected at $0.64, reflecting a 6.7% year-on-year rise. This comes amid observations from Morgan Stanley analysts, who believe Walmart's robust retail media and membership business segments are contributing significantly to this expected growth. The underlying momentum from their e-commerce and third-party marketplace operations also cannot be overlooked.
In a recent report, Morgan Stanley indicated that Walmart's incremental profit margins are likely to surpass expectations, allowing for either reinvestment or accelerated growth opportunities. This leads to an optimistic scenario evaluation, with the target price being adjusted upward by 15% to $153 — a reflection of anticipated growth of 47%. Analysts believe that while market expectations are high about the diverse revenue streams and profit mechanisms of Walmart, there's a prevailing underestimation of the robust dynamics and operational leverage embedded within these streams.
Through a detailed examination of Walmart's alternative income sources, the research suggests that the incremental profit margin could exceed 10%, representing a significant increase of 60% over the average of approximately 6.4% from 2003 to 2010. This uptick in profit margins could translate to consistent annual operating revenue growth of around 12% and a margin expansion of about 30 basis points. Looking ahead, the market anticipates profit margin expansions of roughly 25 and 20 basis points for the fiscal years 2026 and 2027, respectively. This optimistic outlook for margins aligns with the increasing forward price-to-earnings ratio, which currently stands at about 37.5 times earnings. In favorable scenarios, incremental profit margins could reach around 12.5%.
Breaking down the business segments, Walmart's retail media business emerges as the largest contributor to alternative revenue and profit sources, projected to generate approximately $4.4 billion in global advertising revenue by 2024. This sector is anticipated to grow at an impressive compound annual growth rate (CAGR) of 30%, reaching about $9.7 billion by 2027, with revenue from the U.S. market accounting for around $7.1 billion. This segment boasts an EBIT margin nearing 70%, which may comprise approximately 16.2% of the company's total EBIT by 2027, clearly illustrating its profitability potential.
Walmart's membership revenue is also on the rise, with predictions of approximately $3.6 billion from membership fees in 2024. Morgan Stanley estimates a CAGR of approximately 14.5% from 2024 to 2027, culminating in about $5.4 billion by 2027. Notably, while Sam's Club leads in membership revenue contribution, the Walmart+ service is expected to grow at an even faster pace. With EBIT margins projected around 95%, this segment will represent about 12.4% of the overall EBIT, solidifying its role as a crucial profit driver for Walmart.
The third-party marketplace business is rapidly gaining momentum, emerging as one of the fastest-growing revenue streams and a strategic focus for reinvestment. In terms of U.S. e-commerce data for 2024, the gross merchandise volume (GMV) is expected to reach around $92 billion, reflecting a year-over-year increase of about 22%. Out of this, third-party sales could account for about $15 billion, with owned brand sales bringing in approximately $77 billion, showcasing growth rates of 30% and 21% respectively. Although the current EBIT margin for this business is negative, projections indicate that as the scale expands and operational efficiency improves, the profit margin could turn positive within 2 to 3 years, with an optimistic prediction of reaching 6% by 2027, significantly contributing to overall profitability.
In the long run, due to the continued growth in seller count and inventory units, the "long tail effect" afforded by the third-party platform suggests an increasing share of GMV will be generated through this avenue. This trend is critical for Walmart’s sustained growth in a highly competitive retail market.
Status quo shows that Walmart's core e-commerce operations remain dominant, expected to account for roughly 93% of total e-commerce sales in 2024, and continuing to retain about 91% of the market share as we look towards 2027. Forecasts point to a CAGR of approximately 19.5% for GMV from 2019 to 2027, aiming for around $125 billion, indicating substantial growth potential. Currently, the first-party business does face EBIT losses, but with gradual scale growth, economies of scale will start to manifest, paired with the rigorous application of automation technologies that promise effective cost management and improved profit margins. By 2027, margins are projected to improve to -3%, indicating significantly narrower losses and establishing a solid foundation for profitability.
In conclusion, Morgan Stanley notes that the market might be underestimating the pivotal role of the e-commerce model in driving Walmart's future growth. The analysis estimates that this segment could contribute nearly half of the company's sales growth and almost all of its margin expansion. As Walmart continues to adapt to changing market dynamics and consumer behavior, the company’s strategic focus on its media, membership, and e-commerce segments could very well redefine its profitability landscape in the years to come.