Costco's Shares Soar, Hiding an Expensive Reality to Overlook
In a remarkable performance, Costco's stock has outperformed the S&P 500 since its Initial Public Offering (IPO). Over a 35-year period, Costco's stock has seen a gain of approximately 4,150%, while the S&P 500 has gained around 1,700% (excluding dividends) [1].
In the latest quarterly results for fiscal 2025, Costco reported a year-over-year growth of 8.0% in total revenue, reaching $63,205 million [1]. The company's growth trajectory has been impressive, with high growth rates in key metrics such as revenue, earnings per share, and free cash flow over the last decade [1].
Looking ahead, Costco plans to expand its footprint significantly. The retail giant aims to open about 190 new stores in North America, 50 new warehouses in Asia and Australia, and 21 in Europe over the next ten years [1].
However, Costco's current valuation might suggest a different story. The stock is trading at 56 times earnings and 60 times free cash flow, which is above its long-term average and extremely high on an absolute basis [1]. To be fairly valued, Costco must grow its free cash flow by almost 19% annually for the next ten years, followed by 6% growth for perpetuity [1].
Analysts expect Costco to continue its growth streak over the next decade. The stock price is projected to increase around 2.2 to 2.5 times its current level, with a cumulative increase of 124% to 150% from the present value by 2031-2035 [1]. This strong growth trajectory is underpinned by Costco's commitment to digital transformation, as demonstrated by its new tech hub in India and increased hiring in advanced tech roles [2].
Despite these promising forecasts, there are risks to consider. Costco imports about one third of its items, with about two-thirds of those sales in non-foods. Items imported from China represent about 8% of total U.S. sales [1]. Tariffs pose a challenge, and maintaining low prices while navigating these circumstances could be difficult [1]. There's also the risk of passing on higher costs to customers and absorbing higher expenses, which could lead to a lower profit margin [1].
In the most recent quarter, Costco reported a 13.2% year-over-year increase in diluted net income per share, from $3.78 to $4.28 [1]. Operating income also saw a 15.2% year-over-year increase, from $2,197 million to $2,530 million [1].
Costco's wide economic moat around its business protects it from competitors and ensures the free cash flow it generates [1]. However, according to some analysts, the intrinsic value of Costco's stock might be only about half the current stock price, making it a potential "Sell" [1]. Yet, the author would not short the business at this point in time, but suggests it might be the time to trim positions [1]. Costco is not a business the author would buy right now, despite its growth potential and high quality [1].
[1] Data from Costco's Q3 2025 earnings report and analyst forecasts. [2] Data from Costco's press release on its tech initiatives.
In this financial analysis, Costco's growth trajectory is predicted to continue, with stock price projection to increase by 124% to 150% over the next decade [1]. However, concerns about high valuation and potential challenges from tariffs and cost increase necessitate careful consideration for long-term investment in the company [1]. Furthermore, the potential for environmental and health-related risks associated with Costco's reliance on imported goods and large-scale operations might impact their business, requiring attention in the domain of corporate social responsibility and sustainable finance [2].
