Costco's Stock Surges 37.6%: Is it Still a Buy?

Costco's stock price surged 37.6% over the past year, raising questions about its sustainability. Despite showing strong fundamentals, its high valuation could deter new investors. A cautious approach is advisable for short-term traders weighing profit-taking.

Date: 11-01-2025

AI Rating: 6

Costco's Stock Performance Overview
Costco Wholesale Corporation (COST) has achieved a remarkable increase of 37.6% in its stock price over the last year, significantly outpacing its industry and the broader S&P 500 index. This performance is attributed to its stable business model, strong consumer demand, and a loyal membership base. The company also shows impressive membership renewal rates, exceeding 90% in the U.S. and Canada. Membership fee income is reported to have increased by 7.8% year-over-year for the first quarter of fiscal 2025.

Earnings Per Share (EPS)
The Zacks Consensus Estimate for earnings per share has recently been revised. Over the last month, analysts have adjusted their earnings estimates upward for both the current and next fiscal year, suggesting a sentiment of expected growth. Current EPS estimates are expected to be $17.99, reflecting an increase of 11.7%, and $19.67 for the next fiscal year, indicating a 9.4% increase. The upward revisions point toward a favorable outlook and could positively influence stock performance.

Revenue and Sale Growth
Costco has witnessed various sales growth indicators, with comparable sales growth at 7.4% for December, building on previous months' increases of 3.1% and 5.1%. This solid performance is a key driver of revenue growth and is supported by a robust membership model and strong demand for both in-store and online purchases.

Operating Costs and Profit Margins
Operating margins may face scrutiny due to an increase in selling, general and administrative (SG&A) expenses, which rose 9.1% year-over-year due to higher employee wages and logistics costs. While Costco's ability to manage low operating costs is a competitive advantage, higher expenses could impact overall profit margins if they continue to rise.

Valuation Concerns
Despite these positive fundamentals, Costco's stock valuation might raise alarms among investors. The stock currently trades at a forward price-to-earnings ratio of 49.87, which is significantly higher than its peers and the S&P 500 average. This high valuation may limit further stock price increases unless accompanied by corresponding earnings growth.

Despite strong membership and sales growth, competitive pressures from rivals like Walmart and Amazon as well as inflationary concerns could pose risks to Costco's stock momentum. Overall, while Costco showcases strong fundamentals, investor caution is warranted due to valuation and margin pressures.

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