Walmart’s digital momentum signals long-term profit growth: Morgan Stanley

Morgan Stanley's analysis highlights Walmart's successful digital transformation, positioning it as an e-commerce, retail media, and supply chain disruptor with e-commerce losses now nearing breakeven. The firm projects Walmart's U.S. e-commerce unit could generate approximately $6 billion in incremental adjusted operating income over the next three years, with margins potentially reaching 10-12%, driven by synergistic high-margin revenue streams including a profitable advertising business (estimated ~3.5% of GMV with ~70% flow-through) and 15 million Walmart+ subscribers. This strategic shift, evidenced by digital GMV surging to $89 billion and ad revenue to $3.2 billion by 2024, supports long-term earnings growth as these higher-margin segments outpace overall digital sales.

Analysis

According to a Morgan Stanley analysis, Walmart's strategic transformation into a digital platform has fundamentally altered its earnings potential, shifting its narrative from a legacy retailer to a significant e-commerce and retail media competitor. The company's U.S. e-commerce operations are now approaching breakeven, a pivotal milestone after a multi-year investment phase. This inflection is driven by a synergistic digital model combining merchandise sales with high-margin revenue streams from Walmart Connect advertising and Walmart+ memberships. Specifically, advertising contributes an estimated 3.5% of Gross Merchandise Volume (GMV) with a powerful ~70% flow-through to adjusted operating income, while the Walmart+ subscription service now accounts for approximately 15 million members and $1.3 billion in 2024 revenue. The scale of this digital business is substantial, with GMV growing from $59 billion in 2022 to $89 billion in 2024. Looking forward, Morgan Stanley projects this digital flywheel could generate approximately $6 billion in incremental adjusted operating income over the next three years, with the e-commerce unit's margins potentially expanding to a 10% to 12% range as these profitable segments outgrow core digital sales.

Key Decisions for Investors

• Investors should re-evaluate Walmart's valuation beyond that of a traditional retailer, factoring in the growth and high-margin profile of its advertising and membership businesses which represent a significant long-term earnings driver.
• Monitor the growth rates of Walmart Connect ad revenue and Walmart+ subscriber numbers, as these are the primary drivers for the projected margin expansion and the forecast of $6 billion in incremental operating income.
• Consider the execution risk associated with scaling the still loss-making online merchandise segment, as its path to profitability is essential for realizing the full potential of the integrated e-commerce model.