Walmart ($WMT) Short Thesis 04/24/25
Walmart ($WMT) Short Thesis
Walmart’s 37x P/E and 19x EV/EBITDA reflect a valuation disconnect from its deteriorating fundamentals, particularly its exposure to U.S.-China tariffs. With over 60% of its globally sourced merchandise from China and limited pricing power, $WMT faces a 15–20% downside to $75–80 from its current market price of $96 as earnings compress over the next two quarters.
Valuation Disconnect
Extreme Premium: $WMT trades at a 54% P/E premium to its 5-year average (37x vs. 24x) and 19x EV/EBITDA vs. a 13x historical average.
Peer Mispricing: $AMZN trades at 26x forward earnings despite superior growth (cloud, ads) vs. $WMT’s 37x. Amazon's quarterly revenues surpassed Walmart's for the first time this past quarter.
FCF Collapse: FCF yield has fallen to 1.7% from historical 4–8%, signaling overvaluation.
Supply Chain Risks
Tariff Exposure: Tariffs up to 145% on Chinese imports (on a sliding scale) directly threaten $25B+ of WMT’s annual merchandise costs ($102B (China-sourced COGS) × 25% (effective tariff rate)). Napkin math shows 17% of their total sales (80% (U.S. sales) × 35% (imported) × 60% (China-sourced)) are exposed, with a probable larger share of gross margin at risk of erosion.
Supplier Pressure: Chinese authorities summoned $WMT for forcing suppliers to absorb 10% price cuts, risking supply disruptions.
Empty Shelves Warning: This week, $WMT, $LOW, $TGT, and $HD executives privately warned Trump of potential shelf shortages if tariffs persist.
Near-Term Catalysts
Q2-Q3 2025 Earnings Miss:
Morgan Stanley models an average EPS drop of 33% for retailers under tariff pressure.
$WMT scrapped Q1 operating income guidance, citing "week-to-week sales volatility." Walmart shares have risen ~9% in April.
FY26 EPS guidance of $2.50–$2.60 predates tariff escalation.
Multiple Compression:
$WMT’s 37x P/E vs. peers ($BJ (29x), $TJX (28x), $AMZN (26x), $KR (15x), $DG (15x), $TGT (10x)) implies 20-30% downside if rerated.
Defensive positioning masks embedded risks: Walmart+ growth and e-commerce gains are insufficient to offset tariff impacts.
R/R Summary
Downside Target: $75–80 (30-32x P/E on reduced EPS of $2.40–$2.50).
Upside Protection:
Quant-driven and pod “defensive” flows reverse as tariffs bite.
Short interest remains low at ~1.3% of float, amplifying downside potential.
Catalysts: May/August earnings reports, tariff implementation timelines, and supplier renegotiations.
Conclusion: $WMT’s premium valuation ignores supply chain risks and margin erosion. Short to leverage earnings misses and multiple compression as tariffs accelerate. Pair with long $AMZN for relative-value upside.
You can find my Long $AMZN / Short $COST pair trade here: