"Sleepwalker" was reportedly written about Ray Davies's move from London to New York City at the time. The insomniac Davies was then adapting to the 24-hour schedule of the busy city.

Recording for "Sleepwalker" began sometime between 22 and 30 September 1976, cut during the same week as "Sleepless Night" and "Life Goes On" (all three of which would later appear on the final Sleepwalker album). Both "Sleepwalker" and "Sleepless Night" had been recorded in lengthy, seven-minute versions, eventually resulting in the tracks being cut down for their final releases. Backing vocals for the song were added by Ray Davies, Dave Davies, and John Gosling on 11 October of that year.

As the title suggests, "Sleepwalker" is sung from the perspective of a sleepwalker. In the lyrics, the singer claims that "when midnight comes around, [he'll] start to lose [his] mind," calling himself a "sleepwalker", "night stalker", "street walker", and a "night hawker". A break appears midway through the song, described as "Dylanesque" by Denise Sullivan of AllMusic.

"Sleepwalker" was released as the first single from album of the same name. It charted in the American Hot 100 (peaking at #48), the first single from The Kinks to do so since "Apeman". It also hit #54 in Canada.NME stated, "Set to a backdrop highly reminiscent of the hallowed back-'em-up-shut-'em-down riffing of Phase 1 Kinks .. the main squeeze is that The Kinks are making good records again."Melody Maker's opinion of the song was mixed, stating "Kinks fans/lovers of 'Waterloo Sunset' won't find 'Sleepwalker' very satisfactory. Respect The Right Honorable Davies though one must, this isn't quite the leap back to form which was hoped for. Not for the chart." More recently, Denise Sullivan claimed that, in her review of "Sleepwalker", "it's the kitchen sink of rock & roll songs. With all the earmarks of a classic, it's amazing 'Sleepwalker' didn't chart Top 40."

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