Can Costco Reach a Trillion-Dollar Market Cap by 2030?

Currently, there are only nine companies in the coveted trillion-dollar club. While most of these firms are in the technology sector, there is a prominent retailer that has the potential to join their ranks: Costco (COST).

Over the last five years, Costco's stock has surged by 236%, significantly outpacing the S&P 500. This raises an intriguing question: Can Costco achieve a trillion-dollar market cap by 2030? Here’s what investors should consider.

Key Factors Behind Costco’s Success

Costco has become the third-largest retailer globally due to several key advantages. Understanding these traits is essential for investors.

Firstly, Costco’s size gives it a strong competitive edge. With a vast revenue pool and a carefully selected range of products, Costco wields considerable negotiating power with suppliers. This results in lower merchandise costs and allows the company to offer consistently low prices to consumers.

Secondly, Costco enjoys significant customer loyalty. Offering high-quality products at low prices is already a winning strategy, but Costco enhances this with a successful membership system. This model not only generates a reliable income stream but also encourages customers to shop more frequently.

Lastly, Costco's financial health is remarkable. Over the past decade, its revenue has grown at a compound annual growth rate of 8.5%, while diluted earnings per share (EPS) have risen by 13.5% annually. The company tends to perform well regardless of economic conditions—be it during recessions or periods of inflation.

Future Growth Potential

Currently, Costco operates roughly 900 warehouses, with about 70% located in the United States. In fiscal 2024, the company added 29 new locations and plans to open another 26 in the current fiscal year. This expansion strategy is wise, as newly opened warehouses typically see strong initial customer turnout, which leads to increased sales, profits, and memberships.

However, predicting Costco’s ultimate store count is challenging. The company has only begun to enter the vast Chinese market and continues to grow within the U.S.

While Costco does have room for growth, investors should anticipate slower growth rates compared to the past. Increasing revenue will become more challenging as it progresses, and there are limited opportunities to open new warehouses in some regions.

Analysts on Wall Street project a revenue growth rate of about 6.9% annually for the next three fiscal years, which appears to be a realistic estimate.

Valuation Concerns

For Costco to join the $1 trillion club in the next six years, its market cap needs to increase by 126%, equating to a compound annual growth rate of 14.5%. This growth expectation is a slowdown from the 349% increase in market cap over the previous six years.

Although there is a good chance that Costco can maintain healthy growth in revenue and EPS, investors need to be cautious about its valuation. As of now, Costco shares have a price-to-earnings (P/E) ratio of 60, the highest since the company went public in 1985.

It is plausible that the P/E ratio could decline in the coming years, posing a significant challenge to achieving favorable investment returns. This insight leads to the conclusion that Costco may not reach a $1 trillion market cap by the end of the decade.

No stock positions are held by the author or their clients, and the mention of Costco is solely for analytical purposes.

Costco, Growth, Valuation