Walmart Q1 Flywheel Effect Drives Earnings Upside, Morgan Stanley Reiterates Overweight

Overview

This report is Morgan Stanley's forward-looking quarterly earnings and rating reiteration on Walmart Inc. The core view is that Walmart's U.S. e-commerce, membership, advertising and 3P Marketplace are forming a "flywheel effect," which is lifting online revenue growth and strengthening high-margin replacement income, thereby supporting medium- to long-term earnings growth and valuation premium. The report reiterates an Overweight rating with a price target of $140.00.

Core views

Morgan Stanley expects 1FQ27e results to be moderately above market consensus: Walmart U.S. same-store sales are around +3.9% in consensus, while investor expectations are around +4.0% to +4.5%. The report believes Walmart still benefits from value-oriented consumption, consumption downgrading, higher-income household growth and merchandise mix improvement. On the earnings side, 1FQ27e guidance appears conservative; FX is expected to contribute about +1% to net sales and +2% to adjusted operating income, while e-commerce and advertising momentum continues. The report estimates that 1FQ27e adjusted operating profit and EPS growth could have about 2 percentage points of upside above the consensus +8% estimate. However, due to the recent rise in fuel prices, F'27e full-year guidance is likely to remain unchanged in the short term.

Analysis framework

The report uses earnings preview, company communications, historical guidance review, comparable-sales decomposition, tracking of e-commerce and advertising growth, AlphaWise membership survey, FX and cost sensitivity analysis, and valuation multiple and option-implied probability frameworks to assess Walmart's earnings resilience and risk-return profile.

Methodology notes

• Valuation methodsBlended P/E and EV/EBITDA

  multiple valuation

  The target price is based on F'28e EPS of $3.19 at roughly 44.0x blended P/E, or F'28e EBITDA of about $52.8bn at about 22x EV/EBITDA. The report argues that Walmart has shifted from a traditional brick-and-mortar retailer into an e-commerce and supply-chain disrupter, and can therefore enjoy a valuation above historical averages.

• earnings_previewConsensus versus Morgan Stanley estimates

  earnings expectation gap

  The report compares market consensus, investor expectations and Morgan Stanley estimates to assess whether 1FQ27e same-store sales, adjusted operating profit and EPS have upside surprise potential.

• risk_rewardOptions implied probabilities

  option-implied probabilities

  The risk/reward chart uses implied volatility as of May 8, 2026 to estimate the risk-neutral probabilities of the stock reaching bull/base/bear levels within 3 months or 1 year.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• WMT.US

  Core covered name

  Strengths

  Scale advantage, defensive characteristics of grocery and daily necessities, resilience in Walmart U.S. comparable sales, Walmart+ membership growth, high-growth e-commerce and advertising, and a substitute profit pool from the 3P Marketplace.

  Weaknesses

  Valuation is significantly above Walmart's 10-year average P/E, full-year guidance may remain unchanged in the near term, and fuel and freight costs are creating earnings pressure.

  Comparison

  The report argues Walmart has transitioned from a traditional physical retailer vulnerable to AMZN pressure into an e-commerce and supply-chain disrupter; Walmart U.S. comparable-sales performance is also referenced against COST's strong performance of around 7% in March and April.

  Risks

  E-commerce losses re-expanding, U.S. e-commerce growth falling below 15%, comparable sales below 2%, Flipkart losses above expectations, and sustained increases in fuel and freight costs.

• Walmart U.S.

  Main earnings and comparable-sales driver

  Strengths

  Value consumption, trade-down behavior, higher-income household growth, food inflation, and merchandise mix improvement support mid-single-digit comparable sales.

  Weaknesses

  The pharmacy segment is affected by Maximum Fair Pricing rollout and GLP-1 prescription shifts toward lower-cost/generic drugs, creating an estimated 100-basis-point headwind.

  Comparison

  Serves as an industry demand-resilience reference against COST's strong comparable-sales performance.

  Risks

  If lower-income consumer fundamentals deteriorate, or if merchandise mix improvement falls short, comparable sales and margins could be pressured.

• Walmart Connect / Advertising / Marketplace

  High-margin replacement-revenue flywheel

  Strengths

  Advertising revenue in 4FQ26 grew +41%; 3P Marketplace is seen as a core pillar of the substitute-profit model, and the U.S. advertising and Marketplace model is starting to be rolled out internationally.

  Weaknesses

  The business still requires sustained investment and execution, and international replication faces market differences.

  Comparison

  Compared with traditional retail gross profit, advertising, membership and Marketplace revenue have higher margin and platform-like characteristics.

  Risks

  Advertising growth slows, 3P ecosystem expansion underperforms, or international rollout is impeded.

Key data

• RatingOverweightMorgan Stanley reiterates Overweight rating.
• Price Target$140.00The report's opening price target is $140.00; the prior price target was raised to $140 on April 21, 2026.
• Current Share Price$130.43Close as of May 8, 2026.
• 1FQ27e Catalytic Event2026-05-21Walmart 1FQ27e earnings announcement, importance is High, with moderate upside surprise expected.
• Walmart U.S. consensus comparable-store sales+3.9%The report says market expectations are above this consensus, with investor expectations around +4.0% to +4.5%.
• 4FQ26 Walmart U.S. e-commerce sales growth+27%Key evidence supporting continuation of the e-commerce flywheel.
• 4FQ26 Walmart Connect advertising revenue growth+41%Indicates strong momentum in high-margin ad revenue.
• 1FQ27e FX contributionNet sales about +1%, adjusted operating profit about +2%The report estimates MXN-to-USD to appreciate about 16% in 1FQ27e, and Wal-Mart de México accounts for about 13% of consolidated adjusted operating profit.
• Fuel and freight cost impactabout $100m for 1FQ27e, about $1bn annualizedOnly a moderate near-term quarterly profit impact, but at current levels annualized it could create meaningful earnings headwind.
• F'28e EPS$3.19Morgan Stanley estimate used in price target valuation.

Impact & implications

The report has a constructive tilt on WMT. If 1FQ27e results confirm U.S. comparable-store sales, improving e-commerce profitability and growing replacement income from advertising/Marketplace, the market may continue to award Walmart a valuation premium as a high-quality, defensive, scalable retail platform. However, because the F'27e full-year guidance may remain unchanged for now, short-term stock catalysts are more likely to come from quarter-level beat outcomes and 2FQ27e profit-growth acceleration guidance than from an upward revision to full-year guidance.

Risks

• F'27e full-year guidance may remain unchanged in the short term, limiting catalysts from later estimate upgrades.
• Rising fuel and freight prices may create annualized earnings headwind of about $1bn.
• The pharmacy business is affected by Maximum Fair Pricing and GLP-1 prescription mix changes, potentially creating about 100 bps of drag to U.S. comparable sales.
• If e-commerce losses re-expand, the flywheel contribution to margins would weaken.
• If U.S. e-commerce growth falls below 15% or comparable sales drop below 2%, it would challenge the report's bullish case.
• Higher-than-expected Flipkart losses could weigh on international and consolidated profitability.

What to watch

• Whether 1FQ27e results on May 21, 2026 come in moderately above consensus.
• Whether Walmart U.S. comparable sales land in the +4.0% to +4.5% band or above.
• Whether 1FQ27e adjusted operating profit and EPS growth are about 2 percentage points above consensus +8%.
• Whether F'27e full-year guidance remains unchanged and management comments on fuel and freight cost headwinds.
• Whether 2FQ27e outlook implies net sales growth of 3.5% to 4.5% and adjusted operating profit growth of +8% to +10%.
• Progress in Walmart+ membership, 3P Marketplace, Walmart Connect advertising revenue, and international rollout of ad/Marketplace model.