Costco Wholesale (NASDAQ: COST) is one of the biggest retailers in the U.S., and its stock has been a huge winner as well over its history. The company went public in 1985 and has gained more than 60,000% since then, meaning that $1,000 invested in Costco stock would now be worth more than $600,000.
However, past performance isn't a guarantee of future returns, as seasoned investors know, and Costco will have to earn any future price appreciation in the stock. So is Costco a buy today? Let's take a look at the arguments to see which is the best way to go now.
Image source: Costco.
Buy Costco stock
You don't have to try too hard to come up with some good reasons to buy Costco stock. The company is the clear leader in the warehouse retail industry, outpacing both Walmart's Sam's Club and BJ's Wholesale. Its business model has also created a wide economic moat. Costco uses a membership model, attracting members by offering quality bulk goods at bargain prices, and it makes most of its profits from membership fees.
That helps insulate the company from recessions and general volatility in the economy, as it's much less dependent on retail sales than the typical retailer. Additionally, most of its sales come from staples like groceries, which customers buy no matter the state of the economy.
Costco's business model continues to resonate as the company's member renewal rates are above 90%, and it continues to add new members. Costco is also opening new stores, a sign that there is still plenty of white space for the company to grow into, both in the U.S. and abroad. For example, it just opened its first stores in China.
The retailer has a long track of outperformance, a wide economic moat, and plenty of opportunity for growth with new stores, e-commerce, and a high ceiling for same-store sales growth.
Sell Costco stock
It's clear that Costco has a strong business model, but that alone doesn't make a stock a buy. The price has to be right and the company has to be able to grow earnings, and this is where it's worth questioning Costco stock right now.
As the stock has rallied in recent years, its price-to-earnings ratio has expanded, as the chart below shows. As you can see, Costco now trades at a P/E of 40, nearly twice the multiple of the S&P 500 and a price that's significantly higher than that of other brick-and-mortar stocks.
Costco also isn't growing particularly fast, with earnings per share (EPS) rising 8% in the fiscal year that just ended, and that was with an extra week in the calendar. Management cited headwinds in big-ticket items like electronics, though sales of consumer staples remain strong. Comparable sales for the year were up 5.2%, adjusted for fuel and foreign exchange.
Management signaled that it would hold off on raising membership fees due to economic uncertainty, and the company will likely need to grow EPS by more than 8% to justify its current valuation.
Hold Costco stock
Finally, the economic uncertainty may be the best reason to hold Costco stock. While the business has less exposure to the economy than most of its retail peers, the price of the stock adds exposure, especially as rising interest rates could attract investors out of expensive stocks and into bonds, as Treasuries now offer yields above 5% with no risk.
Costco's growth also seems to be moderating following the pandemic-driven boom, and with the headwinds on consumer spending, that could continue in the coming months.
Is Costco a buy, a sell, or a hold?
Costco has a lot of admirable qualities, but the stock is expensive for its current growth rate, and the economic uncertainty also has the potential to affect the company's performance.
I rate Costco a hold right now. Though it has plenty of potential for long-term outperformance, the next year or so could bring only modest improvement. Investors are better off waiting out the volatile economy and looking for that earnings multiple to compress before they buy the stock.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. 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.
