Costco (NASDAQ: COST) has undoubtedly been a fantastic investment over the years. Since its initial public offering in December 1985, the company has generated a monster total return of 165,200% (as of Nov. 22). Early investors who held on have been able to amass meaningful wealth.
But if you're new to the world of investing, it's best to look to the future. Will investors who buy this top retail stock today be set up for life? Let's take a closer look at Costco.
An excellent enterprise
I just mentioned how well Costco shares have performed in the past. Even in more recent times, it's hard to not come away impressed by the huge gains.
In the past five- and 10-year periods, the company has generated a 250% and 751% total return for its investors, respectively. The stock continues to march higher, as it approaches the $1,000 mark.
Of course, this stellar performance usually happens when the underlying business is doing well. That continues to be the case here.
Between fiscal 2014 to fiscal 2024 (ended Sept. 1), Costco's net revenue increased at a compound annual rate of 9.3%. There was not a single year that this top-line figure declined on a year-over-year basis, indicating Costco's remarkable consistency. A global pandemic, supply chain issues, and inflationary pressures weren't enough to derail the positive trend.
From a customer's perspective, Costco has become a top shopping destination. Not only do the company's 890 warehouses offer low prices and great customer service, they do so in a no-frills environment. Seeing how long the lines are outside when a new Costco location opens is a clear indication of how much customers love the brand.
Being able to operate a membership-only model also provides Costco with unique advantages. It generates high-margin, recurring, and predictable revenue. Plus, it supports customer loyalty.
Costco's thriving membership program benefits from proven pricing power. In September, management raised the annual dues. The last previous raise occurred in 2017. This hasn't stopped the customer base from expanding steadily over the years, showcasing the tremendous value that households believe they are getting.
With fourth-quarter 2024 net sales of $78 billion, Costco is the world's third-largest retailer, behind only Walmart and Amazon. That massive scale gives the company a huge leg up when negotiating with its suppliers. Costco has buying power, letting it obtain volume discounts that translate to consistently low prices at its warehouses.
Not many people would argue that Costco isn't a truly great business. This perspective becomes stronger when you think about the rare chance the company will be disrupted. Because Costco isn't some high-flying tech enterprise, for example, and instead operates in the mundane retail sector, it doesn't invite a lot of start-up capital or entrepreneurial effort. This should give investors confidence that Costco will still be relevant and successful for a long time.
Costco's investment prospects
Investing in Costco has clearly worked out well in the past, but what about the future? Can buying the stock now set you up for life?
Not only do I not believe this business can set new investors up for life, I also don't think the stock is worthy of investment consideration right now. It all comes down to valuation for me.
One of the worst things any investor can do is overpay for a stock. Even if the company in question is outstanding on all fronts, like Costco, forward returns can be abysmal if the setup isn't compelling and there's no margin of safety.
As of this writing, Costco trades at a price-to-earnings ratio of 58.2. The stock has never been more expensive, and the current valuation represents a troubling 63% premium to the trailing 10-year average. Given that earnings per share are only projected to increase at a 10.8% annualized clip over the next three years, according to the analyst community, the growth potential doesn't justify paying such a high valuation multiple.
Investors are better off not buying Costco shares today.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $350,915!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $44,492!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $473,142!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of November 25, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, 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.
