Did you know that Costco Wholesale (NASDAQ: COST) was named Yahoo Finance’s Company of the Year in 2022? Winners from previous years include Microsoft, Zoom Video Communications, and Target. Costco getting that honor isn’t too surprising given how successful the warehouse club retailer’s business has proven to be. It thrived during the early stages of the pandemic, and it has remained a retailer of choice for consumers even amid inflation. Costco has been an incredibly popular stock to own as well, with investors willing to pay more than 40 times earnings for it.
But has the stock’s impressive growth over the years made it too expensive to buy it today?
One of the things that has made Costco a popular stock to own in recent years is its resilience and ability to generate strong growth even as other retailers and businesses struggled in an uncertain macroeconomic environment. The company averaged an annual growth rate of 11% over the past five years. Unfortunately, in its most recent earnings report for the period ending May 7, net sales of $52.6 billion grew by only 2%.
In addition to quarterly reports, Costco also posts how it does on a monthly basis. And the positive is that it is showing some minor improvements from month to month. Here’s how it has performed over the past three months:
Comparable Sales Growth
It’s encouraging to see the business showing a positive trend of late. But the big question for investors is whether this is enough growth for a stock that’s trading at a sky-high multiple of 40 times its trailing earnings.
Many stocks that benefited from an increase in spending due to the pandemic have been struggling over the past year as those catalysts have since faded. But with Costco, it appears to be sustaining a new normal. Prior to the pandemic, it was rare for the retail stock to trade much higher than 30 times earnings. Now, however, investors appear comfortable paying in excess of 40, even though the business’ growth rate has slowed down significantly.
Costco’s stock price continued to rally 22% this year even amid its high valuation. It is also inching closer to its consensus analyst price target, which is just under $567.
Costco has a great and profitable business. With membership renewal rates of 90% and higher, it’s a subscription that the vast majority of its customers have no issues with paying. But while the business is solid, the stock may be overdue for a decline. Paying 40 times earnings for a retail stock is a steep premium by any stretch.
Investors who buy the stock now would be pricing in a lot of future growth. And while it’s not unreasonable to expect Costco will continue growing, at such a high valuation there are arguably better growth stocks to buy right now.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Microsoft, Target, and Zoom Video Communications. The Motley Fool has a disclosure policy.
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