Walmart is overvalued; fair price $70 vs current $110.

Costco and Walmart are undoubtedly among the best retailers in the world. Both operate on a very similar business model, which is to offer goods at the lowest possible prices to consumers.

But which of them is the better stock to buy at current market prices? This is the question I want to answer in this video. Based on revenues over the past twelve months, Walmart's revenues are more than double those of Costco.

Walmart generated $736 billion in revenue over the past twelve months, while Costco generated $294 billion.

Walmart has more than 10,000 physical stores worldwide.

In fact, Walmart has done an excellent job of expanding its e-commerce business. In fact, it is gaining market share at the expense of Amazon. Using its network of more than 10,000 locations worldwide, Walmart allows itself to fulfill orders even faster than Amazon can.

So, the biggest thing that surprises people about Walmart and Costco is their profit margins. Walmart's operating profit margin is only 4.4% over the past twelve months, while Costco's is 3.82%, meaning that for every $100 of sales, these companies make an operating profit of about $4. This includes membership fees.

Sometimes I assign students a project about Walmart and Costco at the university. When the students delve into the details and discover these results, they come to me and express their surprise that these companies are only achieving these levels of profitability.

Many people assume that these companies make large profit margins, but this is simply not true. This sector is not a profitable sector.

Walmart and Costco are not the only companies achieving low profit margins. In fact, this includes almost every retailer around the world. But when evaluating Walmart and Costco, this metric becomes increasingly important.

Walmart is very good at this too, but Costco makes it look like a distant second, which it really is with an inventory turnover rate of 12.

Now, let's look at the valuation. Costco's stock is trading at a forward P/E ratio of 36.3, at a premium of about 10% to Walmart, whose stock is trading at a forward P/E ratio of 34.

Now, these are relatively high valuations for traditional retailers, but this only highlights how much respect Walmart and Costco have earned from investors to impose such a high valuation in a sector that is not very profitable.

Therefore, I also calculated the discounted cash flow valuations for these two companies. Walmart's stock appears to be overvalued. I calculated a fair price of $70, while Walmart's current market price is $110.