Where Will Costco Stock Be in 3 Years?

Costco Wholesale (COST 0.10%) has seen its stock value increase by nearly 80% over the past three years. In comparison, the S&P 500 index has risen about 30% in the same period. Costco's remarkable performance can be attributed to its steady growth and ability to withstand various economic challenges. The question now arises: can Costco maintain this upward momentum in the next three years?

To assess Costco's future potential, let us analyze its business model, projected growth rates, and current valuations.

Performance of Costco in Recent Years

Costco excels at utilizing its size to buy and sell products at significantly lower prices than many competing retailers. The company encourages customers to purchase in bulk, offering them the opportunity to save money on their shopping expenses.

While Costco operates with low profit margins, it generates substantial revenue from its higher-margin membership fees, which are a key component of its business model. The company consistently opens new warehouses to attract a broader customer base.

Costco's ongoing success is reliant on several factors, including its ability to grow comparable-store sales, attract new members, maintain high renewal rates, and continue expanding its number of warehouses. Below is a summary of key metrics from the last three fiscal years:

Metric	Fiscal Year 2022	Fiscal Year 2023	Fiscal Year 2024
Adjusted* comps growth	10.6%	5.2%	5.9%
Total cardholders	118.9 million	127.9 million	136.8 million
Worldwide renewal rate	90.4%	90.4%	90.5%
Total warehouses	838	861	891

*Data excludes fuel and foreign exchange variances. Note that the latest fiscal year ended on September 1, 2024.

In addition, Costco raised its membership fees for the first time in seven years this past September. This increase is expected to help counter inflation, cover rising logistics costs for its e-commerce segment, and support wage increases in the United States and Canada.

Outlook for Costco in the Coming Years

Looking ahead to fiscal 2025, Costco plans to open 29 new stores, including three relocations, with 12 of these stores located in the U.S. The company anticipates starting to see the benefits from its increased membership fees in the latter half of the year.

From fiscal 2024 to fiscal 2027, analysts predict Costco's revenue will grow at a compound annual growth rate (CAGR) of 7%. Additionally, earnings per share (EPS) are expected to rise at a CAGR of 10%. This steady growth suggests that Costco will remain a valued investment as it continues to expand comparable-store sales, attract new members, and open new warehouses.

In contrast, Walmart, a competitor of Costco with its Sam's Club warehouses, is projected to grow revenue and EPS at a CAGR of 5% and 17%, respectively, between fiscal 2024 and fiscal 2027.

Is Costco’s Valuation Justified?

While Costco’s core business appears robust, its stock is currently trading at a high valuation of 56 times this year’s earnings. For context, Walmart trades at 40 times this year’s earnings, and its smaller rival, BJ's Wholesale, trades at only 25 times.

Supporters of Costco will argue that the company’s premium valuation is justified due to its strong market position, resilience against economic pressures, and consistent growth trajectory. On the other hand, skeptics suggest that Costco's valuation has been buoyed in recent years by a general shift towards safer investments and the market’s rally based on anticipations of dropping interest rates. Furthermore, Costco's low forward dividend yield of 0.5% may not be appealing to income-focused investors.

Should You Consider Buying Costco Stock Now?

Costco has proven to be a dependable long-term investment; however, it is currently priced quite high. For potential investors, it may be wise to start accumulating Costco stock gradually. However, one should be prepared for the possibility that prices may decline during market corrections over the next three years.

Costco, Stock, Investment