Walmart (WMT) had a rough Thursday. The stock dropped roughly 7.3% on May 21, 2026, closing at $121.34 after a cautious second-quarter outlook overshadowed otherwise solid first-quarter results, CNBC reports.The selloff dragged shares more than 10% below their 52-week high, but Morgan Stanley isn’t flinching.In a note dated May 22, 2026, analysts Simeon Gutman and Pedro Gil reiterated their Overweight rating on WMT and held the firm’s $140 price target steady, implying about 15% upside from current levels.The timing matters. U.S. inflation jumped to 3.8% in April, the highest reading since May 2023, the Bureau of Labor Statistics reported. Energy and food costs led the surge, and that’s exactly the environment Walmart was built to win.
Walmart captured roughly 7.8% of every incremental U.S. retail dollar spent in the first quarter, second only to Amazon.Scott Olson / Getty Images
Why Morgan Stanley is leaning into Walmart amid a 3.8% inflation backdropMorgan Stanley’s thesis hinges on what it calls Walmart’s “eCommerce flywheel,” a self-reinforcing loop of online sales, advertising, and membership income.All three legs are firing in the first quarter.Online sales: roughly +25% year over yearWalmart Connect (advertising): +44%Walmart+ membership income: ~+28%Marketplace gross merchandise value: ~+50%The flywheel generated a record ~$1.1 billion in quarterly operating profit for Walmart U.S., per the Morgan Stanley note. Incremental operating margins on that mix held at about 12%, with higher-margin advertising and membership offsetting losses still bleeding from online fulfillment.Walmart’s most profitable revenue streams are also its fastest-growing.How Walmart is using inflation to widen its grocery moatHere’s the cue Morgan Stanley keeps pointing to.Walmart U.S.’s like-for-like grocery inflation ran just +0.6% year over year in Q1 versus +2.5% for the broader Food-at-Home Consumer Price Index, per the note. That’s roughly 190 basis points (bps) of separation, and it widened sequentially.In plain English: Walmart is keeping its prices down while the rest of the grocery industry passes inflation through to shoppers.Related: Morgan Stanley resets PANW stock price target on demand trendsThis is the trade-down dynamic TheStreet flagged before earnings, and it’s accelerating. Higher-income households earning more than $100,000 a year now drive the majority of Walmart’s market share gains.Beef prices climbed 14.8% over the past year, and gasoline jumped 28.4%, CNBC reports. When a tank of gas and a pound of ground chuck both move that hard, even higher earners hunt for value.What the gross margin numbers actually tell investorsOn paper, Walmart U.S. gross margin barely budged year over year, ticking up only slightly. But that’s not the full story. More Retail Stocks:Walmart earnings reveal concerning shift in customer behaviorBank of America revamps Amazon stock target after earningsBofA sees more room for Home Depot sharesStrip out the cost of higher fuel prices and the impact of fresh grocery price rollbacks, and underlying gross margin expansion was meaningfully stronger.The mix shift toward advertising and membership is doing the heavy lifting, since both are far more profitable than selling groceries or general merchandise.Where the near-term profit pressure is coming fromThe market sold the stock because Walmart’s revenue outlook for the next quarter came in slightly below Wall Street’s expectations, per FinancialContent. The miss was small, but enough to spook investors looking for a clean beat.Morgan Stanley says Walmart’s operating profit still grew in the low single digits last quarter once you strip out currency swings, and the drag on profits is easy to spot:Higher fuel expenses tied to the energy spikeAssociate enrollment costs in benefit programsMedical cost inflation hitting health insuranceThe bank also nudged its earnings forecasts for the next two fiscal years slightly lower, a minor trim rather than a meaningful cut. Walmart’s full guidance and risk factors sit in its SEC filings.How WMT stacks up against Amazon in the retail share fightWMT is still up roughly 7.9% year-to-date even after Thursday’s drop, FinancialContent notes.In the battle for new retail spending, Walmart and Amazon (AMZN) are still grabbing the lion’s share. Walmart pulled in close to 8 cents of every new dollar Americans spent at retail in the first quarter, a step down from the prior quarter.Amazon stayed well ahead, accounting for roughly a fifth of incremental retail spending, though its share also cooled from the previous quarter.Together, the two giants captured nearly 30 cents of every additional dollar shoppers spent, according to Census Bureau data cited by Morgan Stanley. The pie is getting split a little wider, but the same two players are still doing most of the eating.What still needs to happen for the $140 target to play outMorgan Stanley’s $140 target assumes investors will keep paying a steep premium for Walmart’s low-price strategy, roughly double what they’ve historically paid over the past decade.This premium reflects a bet that Walmart’s low-price strategy is quietly building a much more profitable business underneath.For $140 to materialize, the bull case needs:U.S. comparable sales accelerating to mid-to-high single digitsSustained eCommerce growth above 40%Walmart Connect and membership scaling without diluting marginsThe bear case kicks in if eCommerce losses re-expand or U.S. online growth slows below 15%.The takeaway for WMT investorsMorgan Stanley is essentially telling investors that the recent selloff was due to near-term noise and that the long-term buy signal still holds.The eCommerce flywheel, the widening grocery price gap, and the mix shift toward advertising and membership are intact, Walmart’s investor relations data shows. Walmart remains a 52-year Dividend Aristocrat with a conservative payout ratio, giving management room to keep returning cash even if profit flow-through stays choppy.For long-term investors, the question is whether you trust Walmart to keep widening the gap on Amazon and traditional grocers through another inflationary cycle. The setup looks similar to past cycles when WMT used pricing power to gain share, and Morgan Stanley is betting it works again.Just don’t expect a quick rebound. At 43 times earnings, this stock needs profit, not just promises.Related: Morgan Stanley resets Dell stock price target