Costco Wholesale (NASDAQ: COST), with over $200 billion in trailing-12-month sales, has emerged as one of the largest retailers globally, yielding substantial returns to its investors. If you had invested $10,000 in Costco upon its 1985 IPO, you would currently be sitting on nearly $8 million, and over $12 million if dividends were reinvested along the way.
However, instead of fixating on historical data, investors should gauge the current landscape and contemplate the future. Therefore, here are three critical insights for investors contemplating the purchase of Costco stock today.
COST data by YCharts
Uncovering the Unconventional Business Model
To craft an investment thesis, understanding Costco’s unique business model is paramount. Unlike conventional retail chains, Costco, boasting approximately 600 warehouse-style stores in the U.S. and nearly 900 globally, operates on razor-thin margins in its retail business. Remarkably, it emphasizes offering low prices to cater to customer preferences instead of bolstering profits.
Ironically, while the retail business barely breaks even, the real foundation of Costco’s operations lies in selling memberships, which contribute to roughly three-quarters of its profits. Therefore, monitoring membership growth and retention is a crucial factor for prospective Costco shareholders.
The Persistence of Growth Opportunities
While Costco’s management remains reticent about revealing the exact number of targeted locations, the company seems pleasantly surprised by the vast potential for expansion. For fiscal 2024, Costco anticipates opening 31 net new locations, representing a notable enhancement from the 23 new locations in fiscal 2023.
Moreover, the company’s emphasis on domestic and international expansion remains robust, with plans to inaugurate its sixth location in China, a region with the capacity to support numerous additional stores.
The Steep Price Reality
Despite Costco’s robust business model and promising growth prospects, potential investors should be cognizant of the stock’s exorbitant valuation. From a price-to-earnings perspective, the stock is currently trading at its highest valuation in over two decades, reflecting a significant premium of approximately 70% over its 20-year average.
COST PE Ratio data by YCharts
Although renowned investor Charlie Munger was fond of Costco’s business and retained a stake in the company, despite being a staunch value investor, he acknowledged the steep valuation. Therefore, while Costco is undeniably a high-quality entity, its present valuation warrants prudence.
Given the current premium, it would be judicious for potential investors to wait for a more favorable valuation before considering a stake in Costco. However, Costco’s enduring quality renders it a company that cannot simply be disregarded.
While there are numerous attractive investment opportunities in the market, owing to its formidable quality, Costco continues to warrant attention, even as we await a more favorable valuation.
Should you invest $1,000 in Costco Wholesale right now?
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
