Why Retail Giants’ P/E Ratios Are Stronger than Tech leaders

The price-to-earnings P/E ratio is a stock valuation metric that simply divides a company’s share price by its earnings per share (EPS). It is an excellent way to show how much investors are willing to pay for each dollar of a company’s earnings. This helps determine if a company’s stock is overvalued, undervalued, or fairly priced.

A high P/E ratio suggests higher growth expectations. And in most cases, a lower P/E ratio might indicate a stock is undervalued or has poor growth potential.

So, it is no surprise that the P/E ratios of Walmart, Costco, and TJX Cos. are far higher than those of other publicly-traded retailers. These are companies that, as we’ve written about before, have outperformed their peers due to a variety of factors such as strong core capabilities, more convenient real estate locations, much stronger customer experience, and providing merchandise that customers want — and at the best value.

But why do these retailers have higher P/E ratios than most leading companies in other sectors? The answer is more complex and speaks to the mindset of today’s investors and analysts.

Unexpectedly, we found that traditional retail giants such as Walmart, Costco, and TJX Cos. are currently trading at higher P/E ratios than some of the world’s leading technology companies, including Google (Alphabet), Microsoft, and Oracle. This phenomenon — where mature, lower-growth “old economy” stocks are valued more richly on a per-earnings basis than high-growth “new economy” tech giants — spotlights a fundamental shift in investor psychology: the rising premium on stability and perceived safety.

The Current Valuation Landscape

Costco has recently been trading with a P/E ratio around 50, Walmart around 40, and TJX Cos. around 33. In contrast, major tech players such as Alphabet (Google) and Microsoft currently have P/E ratios in the 25 to 37 range, and Oracle’s P/E has been reported near 50, but its forward P/E is often lower, indicating expected earnings growth. It is important to note that while some reports put Oracle’s P/E high, the general trend for established, massive techs’ P/E ratios is relatively much lower than leading retail giants.

This, despite these retailers’ typically modest long-term revenue growth compared to the potential of these highly successful tech leaders, is largely attributed to a market search for defensive stability and investors’ desire for long-term, consistent revenue and earnings growth.

The primary driver is the perception that Walmart, Costco, and TJX Cos. (which includes the nameplates of T.J. Maxx, Marshalls, and Home Goods, among others) are seen as “all-weather” or defensive stocks. These are retailers that provide essential goods and value propositions that allow them to perform relatively well regardless of the economic cycle. 

These retailers also tend to be more resilient to recessions. In times of economic uncertainty, inflation, or tightening household budgets, consumers prioritize value. Companies such as Costco and Walmart benefit as shoppers trade down from higher-priced competitors or focus their spending on groceries and household staples. This makes their earnings stream exceptionally predictable and reliable.

Then there’s the “safety paradox.” Investors are willing to pay a premium (a higher P/E multiple) for this reliability. The belief that “these stocks cannot fall” because their businesses are so fundamental to daily life drives their prices up, despite what might be considered high P/E ratios by historical standards for the retail sector.

Another key factor is that retail tends to be a more transparent business model. Compared to other types of businesses, such as technology, retailing is transactional. Retailers sell products to consumers who want to buy their goods. Simple. As a result, cash flow tends to be more consistent for the top retailers.

These top retailers also deliver more consistent dividends. Walmart, for example, has paid out dividends for 52 consecutive years.

The Tech Contrast: Managing Massive Expectations

While tech companies such as Google and Microsoft boast higher revenue growth potential and wider profit margins, their valuations are subject to different pressures. This includes the “law of large numbers.” As tech companies grow and mature and their market capitalization soars into the trillions, maintaining the hyper-growth rates of their earlier days becomes mathematically challenging. Even strong, double-digit growth may not be enough to justify extremely high P/E ratios when compared to the rock-solid predictability of a retail staple.

Meanwhile, the push into cutting-edge areas such as Artificial Intelligence (AI) and Cloud Computing requires immense and aggressive capital spending on data centers, infrastructure, and R&D. While these investments may lock in future growth, they can weigh on near-term earnings, which is the denominator in the P/E calculation.

[Go Deeper: Why are tech giants investing in nuclear energy? Learn more here.]

Finally, there’s the threat of regulatory scrutiny. Major tech firms often face higher risks from antitrust and regulatory challenges, which can cloud future earnings and introduce a layer of uncertainty that investors factor into their valuation multiples.

A Bet on Certainty?

The current relative valuation discrepancy suggests that the stock market is currently placing a higher value on earnings certainty over a “big bet” on seismic technology shifts. In a macroeconomic environment marked by interest rate shifts and inflationary pressures, the predictable, resilient cash flows of retail giants are prized more highly than ever before.

Investors appear to be saying: “We’ll pay a high price for a dollar of earnings we are sure we will get now and which will steadily increase with minimal risk, even if that dollar doesn’t grow exponentially, rather than paying an even higher price for a dollar of earnings that carries more risk and may not meet sky-high expectations.”

In essence, the higher P/E ratios of the retail stocks are supported by consistent cash flow, defensive positioning, and dependable dividend payments, which are highly valued by investors seeking stability over aggressive, uncertain growth.