Costco stock is more overvalued than Nvidia: still a buy?

The Costco Wholesale (COST) stock price has been in a relentless bull run in the past few decades, making it one of the best-performing companies in Wall Street. It has soared by over 64,000% since going public in 1985. 

It moved from $10 in its IPO to almost $1,000 today, meaning that $1000 invested in the company then would be worth $90,700 today, excluding dividends. 

Strong revenue and profitability growth

Costco Wholesale has done well in the past few decades, helped by its strong store additions. It has moved from a store with 9 locations in 1985 to over 882 today. 

Its annual revenue has moved from over $112 billion in 2014 to over $242 billion in the last financial year. 

At the same time, the company’s profitability growth has accelerated as the net income soared from over $3.7 billion to over $6.2 billion. 

This performance has happened as its number of members has continued growing, albeit at a slower pace. Costco has seen the number of members in its ecosystem jump from over 58 million to about 120 million today.

This growth has been remarkable even as competition in the retail industry has jumped. Most of this competition has come from companies like Amazon, a firm that has over 200 million users in the US and other countries. 

It is also seeing competition from other companies like Walmart, Target, and BJ Wholesalers. Walmart has seen an influx of customers because of its reputation of lower prices. It also owns Sam’s Club, one of the biggest wholesale clubs in the US. 

Costco’s growth is continuing

The most recent financial results showed that Costco’s business continued doing well in the last quarter. Its comparable store sales in the US rose by 6.2% while in Canada and other international markets rose to 7.7% and 6.6%. 

For the first half of the year, its group comparable sales rose to 5.3%. Its e-commerce business is also doing well. Costco’s net sales jumped to over $58 billion while its net income was $1.6 billion. 

The company hopes to continue growing, which explains why it has decided to raise its membership prices. Costco added its annual membership for its US and Canada Gold Sta members by $5 to $65. It also added its Executive Memberships package by $10 to $130. 

These price increases affected 52 million members, with over half of them being executive. As such, if we assume that 26 million are gold star, it means that it will make $1.65 billion in the executive package and over $3.3 billion in its executive segment. 

Additionally, it has one of the best balance sheets in the industry. It has over $5.8 billion and $2.3 billion in long-term debt and operating leases against $14.6 billion in cash and short-term investments

Costco stock had also jumped because of its reliable dividends and the fact that it has some of the top ratings by analysts. The company has a forward dividend yield of 0.51% and a payout ratio of 27%. It has a 5-year growth rate of 17.92%, which is higher than most companies. It has hiked its dividends in the past 19 years, meaning that it is a future dividend aristocrat.

Costco’s valuation concerns

The biggest concern for Costco is that it is one of the most expensive companies in the industry. 

Costco has a market cap of over $402 billion and is expected to have annual revenues of $254 billion and $273 billion this year. With its net profit margin of 2.8%, it means that its annual profit will be $7.1 billion and $7.6 billion.

These numbers mean that the company has a forward P/E ratio of 55, much higher than the industry average of 20.

In contrast, Walmart has a price-to-earnings ratio of 41 and a forward multiple of 33. Nvidia, a company that is growing faster than Costco and has higher margins, has a forward P/E multiple of 42.

These numbers mean that Costco is severely overvalued, meaning that it will need to continue growing to justify the multiple. Costco’s current price of $907 is also higher than the average analyst estimate of $896.

Costco stock price analysis

COST chart by TradingView

The weekly chart shows that the COST share price has been in a strong bull run for a long time. Most recently, the stock moved above the key resistance point at $895, its highest swing in July this year. Moving above that level has had it invalidate the double-top chart pattern.

Costco has remained above all moving averages while the MACD indicator has moved above the neutral point. Therefore, the stock will likely continue rising as bulls target the key resistance point at $1,000. However, the stock will likely resume the downtrend to the next support at $800 in the long term.

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