Bitter Pill To Swallow: Why Walgreens Stock Is Down 60% This Year

Walgreens (NASDAQ:WBA) stock shed 9% of its value yesterday – faring far worse than its peer CVS Health (NYSE:CVS) which lost 3%. This means that the stock is now trading at a level more than 60% below what it started the year at.

The recent selloff in the pharmacy retailer’s stock can primarily be attributed to the announcement of a direct-to-consumer telehealth and e-commerce platform by the pharmaceutical giant – Pfizer (NYSE: PFE). ^[1] The new digital platform – PfizerForAll – is aimed at providing better access to healthcare for common illnesses. Consumers will end up saving more if prescribed with Pfizer medicines. Furthermore, Eli Lilly (NYSE: LLY) announced that it will cut the prices for certain doses of its popular obesity drug – Zepbound – if ordered directly from Eli Lilly’s e-commerce platform. The new pricing for these doses will be 50% cheaper than the other GLP-1 drugs in the market, although the reduced pricing won’t apply to the doses covered by insurance. ^[2]

Now, how does this impact Walgreens? Firstly, the telehealth service will directly compete with Walgreens’ traditional clinics managed by Summit Health. The footfall to these clinics will likely be impacted by easier telehealth assistance on Pfizer’s new platform. Furthermore, direct delivery of drugs will weigh on Walgreens’ retail pharmacy business. On the flip side, Pfizer’s platform may align the patients to Walgreens’ clinics or retail pharmacies for the administration of vaccines.

Walgreens has been focused on expanding its online and primary care offerings to aid revenue growth. The VillageMD acquisition in 2021 was a step in that direction. However, VillageMD had to shut operations at hundreds of clinics in an effort to cut costs and boost profitability. Walgreens also ended up recording a $5.8 billion impairment charge related to its VillageMD investment earlier this fiscal.

Coming to the update from Eli Lilly, given the significant discount for direct consumers to shop from Eli Lilly’s e-commerce platform, there will likely be an impact on Walgreens’ retail pharmacy sales. Now, Walgreens reports its sales under three segments – U.S. Retail Pharmacy, International, and U.S. Healthcare. These segments accounted for 79%, 16%, and 5% of the company’s total sales in fiscal 2023, respectively. With a likely decline in footfall at Walgreens’ stores amid these developments, it will likely weigh on sales of the company’s other products as well as its margin profile.

Overall, the updates from Pfizer and Eli Lilly don’t bode well for Walgreens. And it clearly didn’t sit well with investors as is evident from a 9% fall in its stock yesterday – taking the year-to-date returns to a whopping -63%.

WBA stock has suffered a sharp decline of 75% from levels of $40 in early January 2021 to around $10 now, vs. an increase of about 50% for the S&P 500 over this period. However, the decrease in WBA stock has been far from consistent. Returns for the stock were 31% in 2021, -28% in 2022, and -30% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that WBA underperformed the S&P in 2022 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including IPAR, PG, and KO, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could WBA face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months — or will it see a recovery? We estimate Walgreens’ Valuation to be $12 per share, based on a 6x forward expected adjusted earnings of $2.17 in fiscal 2025, below the 9x average over the last four years. A decline in valuation multiple seems justified, given the bleak profitability outlook for Walgreens and the increased competition from direct e-commerce platforms.

WBA stock has been a falling knife lately and instead of weighing it on the merits of valuation, investors will likely be better off waiting for the recent events to play out. It will be interesting to see how the company performs in Q4 (Q4 for fiscal 2024 will end in August) and what the outlook for fiscal 2025 looks like.

While WBA stock has been on a decline, it is helpful to see how Walgreens’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 8/28/2024
[2] Cumulative total returns since the end of 2016

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1. Pfizer’s Press Release, August 27, 2024 [↩]
2. Eli Lilly’s Press Release, August 27, 2024 [↩]