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Costco Stock: Is Growth Already Priced in?

Costco (NASDAQ:COST) is an American multinational corporation that operates a membership-only chain of big-box retail stores. On September 1, Costco reported its net August sales...
Costco Stock: Is Growth Already Priced in? © Reuters. Costco Stock: Is Growth Already Priced in?

Costco (NASDAQ:COST) is an American multinational corporation that operates a membership-only chain of big-box retail stores.

On September 1, Costco reported its net August sales report, with 14.2%, 15.5%, and 16% growth in sales for its four-, 16-, and 52-week periods.

The company keeps beating estimates, but the stock trades at 40x 2022 EPS. I believe growth is already priced in, and am neutral on the stock going forward. (See Costco stock charts on TipRanks)

Memberships are Costco’s best product, as they compel people to shop in order to gain value from the paid membership. The company had 109.8 million total cardholders as of May 2021, with a 91% renewal rate.

Future Growth, Valuation

Like many retailers, such as Target (NYSE:TGT) or Amazon (NASDAQ:AMZN), Costco is benefiting from the remote-work trend, as more meals get cooked at home.

The company will report its fourth quarter and fiscal 2021 annual results on September 23. Usually, the fourth quarter is Costco’s strongest quarter by far, and it could be a record-breaker in terms of revenue.

Overall, everything looks excellent from a business perspective. However, price is important. Companies as well-known as Costco are difficult to find at cheap prices, so overpaying a bit is common. Nonetheless, Costco looks too expensive at 40x 2022 EPS.

Competitors such as Walmart (NYSE:WMT) or Target are trading at 23x and 20x 2022 EPS respectively. While Costco may be a better company than Target or Walmart, this does not seem right. There are better opportunities in the market right now, which will probably give better future returns to investors. 

Wall Street's Take

According to Wall Street, Costco has a Strong Buy consensus rating, based on 13 Buys, four Holds and zero Sells assigned in the past three months. At $468.14, the average Costco price target implies 1.8% upside potential.

Bottom Line

There are a lot of companies like Costco in today’s market.

Great businesses, with defined competitive advantages, trading at high multiples.

The stock price will keep rising, there is no doubt, but at a much lower pace. This happens to every richly valued business in the stock market. Costco is due for some compression, either by a decline in price or by fundamentals catching up with the price.

Disclosure: Álvaro Romero held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

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 EUR/USD1.0658↑ Sell
 GBP/USD1.2475↑ Sell
 USD/JPY157.91↑ Buy
 AUD/USD0.6469Neutral
 USD/CAD1.3780↑ Buy
 EUR/JPY168.32↑ Buy
 EUR/CHF0.9808Neutral
 Gold2,295.80↑ Sell
 Silver26.677↑ Sell
 Copper4.5305↑ Buy
 Crude Oil WTI81.14↑ Sell
 Brent Oil85.62↑ Sell
 Natural Gas1.946↑ Sell
 US Coffee C213.73↑ Sell
 Euro Stoxx 504,920.55↑ Sell
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 DAX17,921.95↑ Sell
 FTSE 1008,144.13Sell
 Hang Seng17,763.03↑ Sell
 Small Cap 20001,973.05↑ Sell
 IBEX 3510,854.40Neutral
 BASF49.155↑ Sell
 Bayer27.35↑ Sell
 Allianz266.60↑ Sell
 Adidas226.40↑ Sell
 Lufthansa6.714Neutral
 Siemens AG175.90↑ Sell
 Deutsche Bank AG15.010Neutral
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