Walmart gets downgrade due to Flipkart's weight on profits for 'the next couple of years': Raymond James

  • "Flipkart will likely weigh on consolidated operating earnings for the next couple of years," Raymond James analyst Budd Bugatch says.
  • Walmart's stock moved 9.3 percent higher Thursday, its biggest daily gain since Nov. 16, 2017.
  • "We are using our Outperform rating to confirm our favorable view, but suggest investors now need a longer investment horizon," Bugatch says.
An employee puts a low price dollar sign together at a Walmart store.
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Raymond James on Friday lowered its rating on Walmart stock to outperform from strong buy, pointing to the acquisition of Flipkart as a drag on future profit despite the retailer's strong earnings report this week.

Flipkart is the largest e-commerce player in India, a market in which online sales are growing by roughly 35 percent a year, according to data tracker Euromonitor. Flipkart is viewed as a direct competitor to Amazon, which is also investing in India.

"We cannot ignore the facts that Flipkart will likely weigh on consolidated operating earnings for the next couple of years," Raymond James analyst Budd Bugatch wrote in a note. While the firm has a "positive view" of Walmart's strategy, Bugatch said "there could be near-term choppiness and risk and market celebrations like the one on Thursday don't always provide a lasting change."

Shares of Walmart rose 0.6 percent in trading Friday. The company's stock closed at $98.64 per share on Thursday, up 9.3 percent after it posted its highest domestic same-store sales growth in more than 10 years for its second quarter. Walmart reported an increase of 4.5 percent, nearly double the Thomson Reuters estimates of 2.4 percent.

"Make no mistake, [the second quarter's] sales and earnings were the best quarterly performance that management has delivered since the Great Recession," Bugatch said. "Thursday's [over 9 percent] move in Walmart was well-earned and a significant endorsement of the company's strategy as well as the execution from both leadership and associates."

The stock's move higher represented its biggest daily gain since Nov. 16, 2017, when Walmart climbed 10.9 percent.

Raymond James bumped up its price target on Walmart shares, to $107 per share from $100 per share.

"We are using our Outperform rating to confirm our favorable view, but suggest investors now need a longer investment horizon," Bugatch said.

The retailer said it had the strongest growth in more than a decade at stores open for at least 12 months, thanks to robust sales in its grocery and apparel departments, both of which Walmart has poured money into to compete with the likes of Amazon and Kroger.

Walmart said U.S. online sales climbed 40 percent during the quarter — a sign that changes like a new website redesign and grocery delivery options are paying off — and the company is still anticipating an increase of 40 percent for the full year. In prior quarters, Walmart's digital sales growth had moderated somewhat from a 50 percent jump logged in the third quarter of last year.

– CNBC's Lauren Thomas contributed to this report.