(MONEY Magazine) – To fans and critics alike, Wal-Mart (WMT) seems all-powerful. It is the largest company on the planet, both in terms of annual revenue ($260 billion) and employees (1.3 million). The retail giant has the scale to undercut its competitors and the market clout to squeeze suppliers. It dominates nearly every category it competes in, from DVDs to apparel to toys to groceries, and maintains a computer database so vast that it rivals the Pentagon's. Wal-Mart has actually reordered the U.S. economy, changing how we shop and what we pay for the stuff we buy.

And Wal-Mart stock? What a dud. The shares are down 25% from an all-time high of $70 in 1999; over the past 12 months, Wal-Mart has fallen 7% vs. a 10% gain for the S&P 500. At $52 a share in late July, Wal-Mart was worth about 25 times its earnings over the past 12 months, the stock's lowest valuation in seven years. Those numbers raise the question of whether this might be a good time to buy a great company at a less-than-everyday low price. But just because a stock is cheaper than it used to be doesn't make it a bargain.

WHY IT'S DOWN NOW

There are two reasons investors have turned nervous about Wal-Mart recently. First, from where Wal-Mart stands, the economy is still pretty weak. While higher-income households seem to be doing well--stocks of high-end retailers like Nordstrom and Neiman Marcus have performed quite well over the past year--the middle- and lower-income consumers who are Wal-Mart's bread and butter are still being pinched by stagnant wage growth and higher prices on everything from gasoline to milk. In June, Wal-Mart said sales at stores open at least one year grew just 2%, not the 4% to 6% it had predicted. Wal-Mart expected to report similarly tepid numbers for July.

Wal-Mart also faces numerous lawsuits over its employment practices. The latest blow came in June, when a San Francisco judge granted class-action status to a broad-based sexual-discrimination lawsuit against Wal-Mart. That's the largest-ever civil rights lawsuit against a private employer.

AN EASY FIX?

It's possible to argue that these are short-term problems. If the economy continues to rebound, Wal-Mart's core customers will eventually spend more money too. And Wal-Mart has plenty of cash on hand to fight all those lawsuits.

But even if the market's worries about these latest problems are a bit overdone, you may still have a hard time making money on Wal-Mart at its current price. Yes, a P/E ratio of 25 looks low relative to the company's recent history. But you've got to be careful with such comparisons these days. It is relatively easy for any company to appear cheap when compared with the speculative highs the market reached in 1998 and 1999. And Wal-Mart had something back then it doesn't have now: 25% profit growth. "This company's growth rate is going to continue to slow--not dramatically, but gradually," says analyst Mark Mandel of Fulcrum Global Partners. Look for Wal-Mart's earnings to grow around 13% a year through 2008.

THE PRICE OF SUCCESS

Wal-Mart already has nearly 5,000 stores worldwide, and it's finding it has to spend more to grow from here. Over the next five years, it plans to double the number of its supercenters to 2,600. These 200,000-square-foot megastores--which add groceries to Wal-Mart's traditional discount merchandise--cost more to operate because selling groceries requires more workers. Wal-Mart's costs will also rise as the company moves more aggressively into urban markets, where real estate is more expensive and wages are higher.

International markets are Wal-Mart's other source of growth. But the company will have a hard time maintaining profit margins overseas because it does not yet have the supply-chain advantages it enjoys in the U.S. And even if Wal-Mart settles the class-action lawsuit, as most observers expect it will, any agreement is likely to force the company to change how it pays and promotes its employees. That could erode a key competitive advantage. Today the company's operating costs, which are mostly labor, take up just 17% of revenue, compared with 22% at archrival Target.

Sanford C. Bernstein research analyst Emme Kozloff reckons that Wal-Mart must achieve 8% growth in same-store sales to overcome its rising expenses. That's certainly possible--growth in that measure has been as high as 14%. But remember, it's just 2% now.

Wal-Mart has certainly surprised naysayers before: Wall Street thought the company's best days were behind it back in 1996, when a share could still be had for less than a quarter of today's price. And despite the problems we've just described, Wal-Mart is still very, very well-run. Over the long term, its stock price ought to rise steadily to remain in line with growth in earnings.

But the point is that you could probably do much better putting your money in a stock with faster growth ahead of it, or one that is cheaper. Even after years of flat stock performance, Wal-Mart's P/E ratio based on expected 2004 earnings is still a heady 23 vs. the S&P 500 average of 17. Says Sanford C. Bernstein's Kozloff: "Given all the challenges facing the company, it's not something you want to own at a premium price."