UBS: Walmart's Second P&L Businesses Are Undervalued; Long-Term Earnings Structure Set to Be Reshaped

Overview

UBS published an earnings review on Walmart, focusing on three major market controversies regarding its 'Second P&L' (referring to non-traditional retail businesses such as third-party marketplace, advertising, data monetization, and membership). The core conclusion is that the market has not fully priced in the magnitude of earnings contributions from these emerging businesses or the duration of their high growth. Analysts believe these businesses will become Walmart's primary source of earnings in the near future, driving a long-term valuation re-rating.

Core views

Underestimated Scale and Durability: The report notes that while the market acknowledges the importance of the 2nd P&L, it underestimates both the magnitude and duration of its growth. Updated analyst forecasts project alternative revenue streams to grow at a 5-year CAGR of 28%. By FY2030, the 2nd P&L is expected to contribute over 50% of EBIT and drive 75% of EPS growth (contributing approx. US$2.80 to a total EPS forecast of US$5.40). Extrapolating to 2035, under the base case, these businesses would account for approximately two-thirds of total operating income. Margin Expansion vs. Reinvestment Balance: Addressing concerns that profits might be reinvested rather than realized, the report argues Walmart has the flexibility to expand operating margins while reinvesting for growth. In the base case, operating margin is projected to rise to approx. 6.5% by 2030 (+230bps vs. 2025) and reach 8% by 2035. As the share of high-margin 2nd P&L businesses increases, overall capital intensity decreases, enhancing free cash flow conversion. Segment Updates: Third-Party Marketplace is the engine; FY2026 revenue growth forecast raised to 32%, though near-term margin forecast lowered to 3% to prioritize growth, targeting 8% by 2030. Fulfillment Services (WFS) FY2026 revenue growth forecast raised to 50%, with profitability timeline pushed to 2030. Advertising business is at an inflection point; 35% growth in 2026 is appropriate, with a long-term CAGR of 29% and EBIT margin targeting 75% by 2030. Data monetization growth far exceeds expectations, with 2026 growth projected at 95%. Membership (WMT+) penetration is only 10%, indicating significant upside. Valuation Analysis: Via reverse DCF analysis, the long-term operating margin implied by the current stock price is 7.7% in the base case and 6.1% in the bull case, both below the analyst's forecast of 8.1% EBIT margin by 2035. This suggests the market is discounting Walmart's ability to achieve upside scenarios; if the company delivers on forecasts, there is upside potential for the stock.

Analysis framework

The report employs two primary methodologies: **Benchmarking Analysis** and **Reverse DCF Valuation**. First, it compares Walmart's 2nd P&L metrics (e.g., 3P GMV, ad revenue) against Amazon's (AMZN) historical performance at similar scale stages to validate the achievability of Walmart's growth potential (noting Amazon achieved higher CAGRs at similar stages). Second, using a Reverse DCF model, it derives the market-implied long-term margin assumptions from the current stock price and compares them with analyst long-term forecasts to quantify whether current valuations adequately reflect the company's long-term growth potential. This combined approach validates the rationale behind the growth logic while providing a margin of safety analysis from a valuation perspective.

Methodology notes

• Valuation MethodologyDCF Model

  Reverse DCF Analysis

  Derives market-implied long-term growth rates or margin assumptions from the current stock price. Used here to compare market-implied long-term operating margins (e.g., 7.7%) against analyst forecasts (e.g., 8.1%) to assess whether the stock price undervalues the company's long-term profitability.

• Industry/Sector Analysis Framework

  2nd P&L Analysis

  Separately forecasting and analyzing the company's traditional core business versus emerging high-growth, high-margin businesses (e.g., platform, advertising, data). Used here to highlight Walmart's earnings structure transformation, illustrating how emerging businesses will gradually replace traditional retail as the primary profit driver.

• Competition & Strategy Framework

  Benchmarking Analysis

  Comparing key metrics (e.g., GMV growth, ad take rate) of the target company against industry leaders (e.g., Amazon) at similar development stages. Used here to substantiate the reasonableness and achievability of Walmart's emerging business growth targets.

Key data

• 12-Month RatingBuyUBS Rating
• Target PriceUS$147.00Upside from current price of US$131.60 as of May 1, 2026
• 2nd P&L Revenue 5-Year CAGR28%Base Case Forecast
• 2030 2nd P&L Share of EBIT>50%Base Case
• 2030 Operating Margin Forecast~6.5%Increase of approx. 230bps vs. 2025
• 2035 EBIT Margin Forecast8.1%Base Case
• Advertising Business 2030 EBIT Margin75%High-margin business
• Data Monetization 2026E Growth95%Far exceeding expectations

Impact & implications

The report suggests Walmart is at a critical juncture in its earnings structure transformation, where the rise of Second P&L businesses will significantly improve profit quality and valuation multiples. For investors, this implies shifting focus beyond traditional retail same-store sales to prioritize the growth trajectory of high-margin emerging businesses. If execution aligns with expectations, the current stock price does not fully reflect long-term earnings potential, presenting opportunities for valuation repair and expansion.

Risks

• Execution Risk: Complexity of managing nearly US$500 billion in sales scale
• Intensified Competition: Price and market share competition from online retailers and brick-and-mortar peers
• Macroeconomic Pressure: Consumer income stress potentially impacting sales and profits
• Margin Volatility: Excessive price investment could impact near-term profit performance
• International Business Risks: FX, political, and country-specific execution risks

What to watch

• Whether actual growth rates of 2nd P&L businesses consistently outpace traditional retail
• Whether operating margins expand towards 6.5%-8% as planned
• Monetization progress in advertising and data businesses
• Improvement in WMT+ membership penetration rates
• Conversion efficiency of CapEx to Free Cash Flow