Morgan Stanley: Walmart E‑Commerce to Yield $6B Profit

Walmart’s e-commerce growth and digital advertising revenue drive analyst projections for multibillion-dollar profit expansion through 2027

Key Takeaways

• $6 billion profit potential: Morgan Stanley estimates Walmart’s U.S. e-commerce unit could generate $6 billion in additional adjusted operating income over three years, with margins reaching 10-12%
• Digital revenue surge: Digital GMV jumped from $59 billion in 2022 to $89 billion in 2024, while advertising revenue expanded from $1.9 billion to $3.2 billion in the same period
• Strong quarterly performance: Walmart reported Q1 2025 net sales of $169.6 billion, up 5.5% year-over-year, with e-commerce sales rising 22% and adjusted earnings per share beating consensus by 5 cents

Introduction

Walmart’s digital transformation from traditional retailer to e-commerce powerhouse positions the company for substantial long-term profit growth. Morgan Stanley analysts project the retail giant’s U.S. e-commerce operations could generate $6 billion in additional operating income over the next three years.

The Bentonville-based company has evolved from being disrupted by Amazon into a major player across e-commerce, retail media, and supply chain innovation. This strategic shift addresses investor concerns about digital profitability while demonstrating competitive strength against online rivals.

Key Developments

Morgan Stanley identifies three distinct phases in Walmart’s digital evolution. The company experienced modest growth from 2009 to 2012, followed by an investment-heavy period from 2013 to 2019, and now operates in an era marked by reduced e-commerce losses and increased operating margins.

Digital penetration has risen from 14.3% in fiscal year 2023 to 18% in fiscal year 2025. The company’s e-commerce “Block” comprises three interconnected revenue streams: online merchandise sales, Walmart Connect advertising, and Walmart+ membership fees.

E-commerce losses have narrowed to near-breakeven due to economies of scale, area densification, and high-margin revenue streams gaining momentum. Four next-generation fulfillment centers have doubled throughput and cut handling costs by approximately 20%, supporting the goal to automate 55% of volume by fiscal year 2026.

Market Impact

Walmart shares rallied more than 3% in early trading following the earnings announcement, with the stock up 64% since the start of the year. Over the past 52 weeks, shares have traded between $47.85 and $87.88, reaching new highs after the quarterly results.

The company’s advertising business shows particularly strong momentum, with Walmart Connect ads growing 24% in Q4 fiscal year 2025 and 31% in Q1 fiscal year 2026. This high-margin revenue stream contributes around 3.5% of gross merchandise value, with approximately 70% impacting adjusted operating income.

Morgan Stanley analysts set a price target of $115, about 10% above recent closing prices, with best-case scenarios seeing shares above $150. However, Bank of America analysts suggest Walmart shares are near their peak with limited upward potential compared to peers.

Strategic Insights

Walmart’s competitive advantage stems from its omnichannel strategy and value proposition. The company maintains pricing that is 10% to 12% cheaper than competitors for average food baskets, according to Goldman Sachs analysis.

The retailer benefits from scale advantages that smaller competitors cannot match. Same-day delivery now reaches 93% of U.S. households, while express delivery under three hours covers 30% of orders. Omnichannel shoppers represent the most valuable segment, spending an average of $1,044 monthly at 25.6% margins.

Walmart’s ancillary businesses including advertising, data analytics, third-party marketplace, and logistics services provide significant competitive moats. The company’s proprietary AI-driven ‘Wally’ demand engine enhances inventory management, forecasting, and customer personalization across operations.

Expert Opinions and Data

“We had a strong quarter, continuing our momentum,” CEO Doug McMillon stated. “In the U.S., in-store volumes grew, pickup from store grew faster, and delivery from store grew even faster than that.”

Simeon Gutman, Morgan Stanley analyst, observes a retail shift where “the big keep getting bigger and the winners are taking more, with Walmart and Costco leading the way.” He emphasizes that Walmart’s technology stack and data capabilities create substantial advantages over smaller retailers.

Kate McShane from Goldman Sachs notes that Walmart “continues to grow margins and profitability which should drive improved earnings for the longer term.” J.P. Morgan’s Matt Boss highlights that nearly 50% of U.S. consumption comes from higher-income groups seeking value, benefiting Walmart’s market share gains.

The retail giant operates over 10,500 stores across 19 countries, with grocery comprising approximately 60% of U.S. sales. Walmart+ membership has reached 15 million subscribers, generating $1.3 billion in 2024 revenue and representing a key pillar in the company’s profit strategy.

Conclusion

Walmart’s digital transformation demonstrates how traditional retailers can successfully compete against pure-play e-commerce companies through integrated strategies and operational excellence. The company’s ability to leverage physical infrastructure for digital fulfillment while building high-margin advertising and membership businesses creates multiple profit drivers.

Strong financial performance across all segments, combined with technological investments and automation initiatives, positions Walmart to sustain competitive advantages in the evolving retail landscape. The integration of AI, expanded fulfillment capabilities, and growing digital revenue streams support long-term earnings growth expectations.