Yahoo Finance

Key Points

• One of Walmart's biggest rivals, Target, isn't looking so big anymore and is just a fraction of its size.

• Walmart has typically been more valuable than Target, but the gap has widened significantly.

• As interest rates rose in 2022, investors appear to have dumped Target's stock in favor of Walmart.

• 10 stocks we like better than Target ›

Walmart (NYSE: WMT) is one of the most valuable companies in the world, approaching $800 billion in market value. It looks on track to become the first retailer to hit the $1 trillion mark. In just the past three years, it has risen by more than 130%.

But what about one of its key rivals, Target (NYSE: TGT)? It has been going in the opposite direction lately. And the divergence has become so significant that it is worth just $43 billion, close to 5% of Walmart's overall valuation.

Here's a look at how big the gap between these two stocks used to be, why it has changed drastically, and what it could mean for investors.

A big reversal started to take place in 2022

If you look at the returns of these two retail stocks over the past 10 years, you can see that Walmart has clearly been the better buy -- but not always. It wasn't until 2022 with rising interest rates and a slowdown in consumer spending that the tide turned. Up until then, Target was looking like the better buy.

However, as consumers put the brakes on discretionary spending, and with Target being more dependent on discretionary purchases, that led investors to pivot away from Target and load up on Walmart's stock.

Walmart's business is more heavily tilted toward groceries. They account for close to 60% of the company's revenue, versus closer to 20% for Target. And so it has been better positioned to do well amid a challenging economy. Its results have been better, and investors have also been more optimistic about its growth.

Have their relative valuations gotten out of hand?

Walmart is the safer buy, and Target is certainly riskier, but the big question right now is whether there's too much bullishness around Walmart and too much bearishness on Target. The chart below shows the ratio of Walmart's valuation in relation to Target's over the years.

Prior to that divergence that has taken place since 2022, Walmart was around three times more valuable than Target. Now, it's 18 times more valuable, with Walmart stock trading at 41 times its trailing earnings while Target trades at a multiple of just 10.

Is Walmart still the better buy?

Target has been performing poorly of late, and it recently missed expectations again in its latest quarterly results. Times are tough for the retailer, and the risk of tariffs only exacerbates concerns about its future.