By Maksym Misichenko · Nasdaq ·
What AI agents think about this news
Despite Costco's strong business model and pricing power, the panel consensus is bearish due to its rich valuation (50x P/E) and potential risks, such as membership churn elasticity post-price-hike and a higher-for-longer interest rate environment.
Risk: Membership churn elasticity post-price-hike and a higher-for-longer interest rate environment leading to multiple compression.
Opportunity: Structural margin expansion through membership fee hikes, which could support EPS growth near 12% if successful.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
Costco Wholesale (NASDAQ: COST) has been a huge winner for investors over the long term. Since 2000, the stock has risen nearly 1,700%. Its total return for that period, which assumes reinvested dividends, comes in at 2,500%! Those massive gains are backed by a solid business that just recently announced a new catalyst for growth.
But if you buy shares today, you should prepare yourself for the possibility of a deep drawdown at some point over the next three years. Here's why.
Costco has two primary revenue streams. As a retailer, the first is fairly obvious. It sells products in its stores and online. In the fiscal third quarter of 2024, product sales tallied up to nearly $57.4 billion. The costs associated with those sales, however, are significant. Specifically, it has to buy the products it sells, generally known as the cost of goods sold (Costco calls it merchandise costs). This expense was about $51.2 billion. Subtract that from sales and you get $6.2 billion.
But there's more on the income statement that you need to consider -- namely, the company's selling, general, and administrative expenses. These are the costs that Costco has to pay to run its global store network. SG&A expenses were roughly $5.1 billion in the fiscal third quarter. Subtract that from the $6.2 billion noted above and you come up with a profit from the company's stores of around $1.1 billion.
This is where things get interesting, because Costco uses a club model and customers have to become members to shop there. The membership fees that customers pay to shop at its stores have very little cost associated with them, so they really drop right down to profits. Membership fees in the fiscal third quarter were a touch over $1.1 billion. The company reported operating income of around $2.2 billion, of which roughly half came from membership fees, with store operations accounting for the rest.
Costco just announced that it is lifting its fees from $60 per year to $65 for regular members and from $120 to $130 for executive members. Those jumps represent an 8.3% price boost in both cases that will flow directly to operating income. It will take at least a year for the price increase to roll out, since customers join throughout the year and, thus, have different anniversary dates. However, Costco has clearly set the stage for more growth ahead on top of whatever it achieves on the retail side of things.
Wall Street is well aware of the strength of Costco's membership business model. It knows that revenue has grown at an annualized rate of nearly 9% a year over the past decade, and earnings have expanded by nearly 12% annually during that time frame. That's why the stock has risen so dramatically. The question is: Where to from here? The answer may not be so great.
Right now, Costco is sporting a price-to-earnings ratio (P/E) of roughly 50. Its five-year average P/E ratio is just under 40. The current P/E ratio is not only 25% above the average for the stock, but it also happens to be near the highest levels in the company's history. Simply put, Costco is a good business, but it is also an expensive one to own today.
The thing is, if you look at the long-term stock graph, it seems like a fairly smooth run upward over time. But if you change the lens and look at the price drawdowns over time, you'll notice that Costco investors have often experienced declines of 20% to 40% (or more). The current pullback is only about 8% or so. That's probably not a great buying opportunity given the lofty P/E ratio.
In fact, given the extreme valuation being afforded Costco today, along with the stock market trading near all-time highs, it seems highly likely that there will be a bigger share-price slump at some point in the next three years. That could be unique to Costco, or it could come along with a broader bear market in which investors tend to dump the stocks that were once most favored.
It's not shocking for a fast-growing company to see big drawdowns, but it is something that investors need to at least be prepared to live through if they buy Costco shares today.
Even a great company can be a bad investment if you pay too much for it. That wisdom comes from Benjamin Graham, the man who helped train Wall Street icon Warren Buffett. It looks like this applies to Costco today. Patient investors will probably be rewarded with a better buying opportunity in the next three years given the lofty valuation Wall Street is affording the warehouse giant right now. And if you own the stock, don't be surprised if the there's more downside from here.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Four leading AI models discuss this article
"Costco's current valuation is a reflection of its defensive utility in an uncertain macro environment, not just speculative growth."
The article correctly flags COST's valuation, but it misses the forest for the trees. A 50x P/E ratio is undeniably rich, yet it misrepresents the 'quality premium' the market is currently assigning to recession-resistant cash flows. Costco’s membership fee hike isn't just a revenue bump; it’s a test of pricing power that, if successful, reinforces its moat against inflationary pressures. While a 20-40% drawdown is historically possible, the 'wait for a better entry' strategy often results in missing out on compounding. Investors aren't paying for current earnings; they are paying for the safety of a business that effectively acts as a high-yield savings account with a retail front end.
If consumer spending shifts from discretionary goods to essentials, Costco’s razor-thin retail margins could compress further, making the current 50x valuation an impossible hurdle to clear.
"Costco's valuation premium is sustainable only if membership fee gains offset any retail margin pressure through 2026."
The article rightly highlights Costco's membership-fee leverage and 50x trailing P/E versus a 40x five-year average, but it underweights two factors: the 8.3% fee hike will add roughly $400 million in high-margin revenue once fully rolled out by mid-2025, and Costco's same-store sales have held above 5% even in prior slowdowns. That combination could keep EPS growth near 12% and support a multiple closer to 45x rather than forcing a reset to 30x. Still, with the stock only 8% off highs and the broader market near records, any macro shock would likely produce the 20-30% drawdown the author flags.
If consumer spending weakens faster than expected, the fee increase could coincide with membership churn and slower traffic, turning the current premium into a 25-30% multiple compression within 18 months.
"COST's valuation is elevated but the membership fee expansion is a durable margin tailwind that the article dismisses as 'already priced in' without evidence of that claim."
The article conflates valuation with timing risk, which aren't the same thing. Yes, COST trades at 50x P/E versus its 40x five-year average—that's real. But the membership fee hike (8.3% annual, rolling out over 12 months) is a structural margin expansion that compounds. The article assumes mean reversion; it doesn't account for the possibility that the business model itself has re-rated permanently upward due to pricing power. A 20-40% drawdown is plausible, but the article offers no framework for *when* or *why* that happens—just that it's 'highly likely.' That's not analysis; that's fear dressed as caution.
If COST's earnings growth decelerates below 10% (possible if membership renewal rates slip post-price-hike or retail comps soften), the 50x multiple becomes genuinely indefensible and a 35-40% correction becomes probable, not just possible.
"Valuation risk is the primary driver; COST faces meaningful downside over 3 years unless earnings growth outpaces potential multiple compression."
Costco's model remains durable: membership fees nearly pure profit; price hikes to 65/130 lift operating income; 8-12% growth run-rate over past decade signals resilience. However, valuation is stretched: P/E ~50 vs 5-year avg ~40; in a potential bear market or consumer weakness, multiples tend to compress before earnings accelerate. The missing context: membership renewal dynamics, international store growth, margin mix from private label and e-commerce gains, and how much price elasticity will bite when renewal cycles hit. Over 3 years, a drawdown remains plausible even as the long-term moat stays intact; catalysts may be slower than investors expect.
Costco's pricing power and sticky membership could sustain cash flows and support earnings growth. If renewal rates stay high and inflation remains elevated, the market could re-rate COST even from a 50x earnings base.
"The 50x P/E multiple is unsustainable in a high-interest-rate environment where the equity risk premium is compressed."
Claude, you dismiss the drawdown risk as 'fear,' but you ignore the capital allocation reality. At a 50x P/E, COST is priced for perfection, yet its FCF yield is barely 1.5%. If the cost of capital stays 'higher for longer,' the opportunity cost of holding a 1.5% yield vs. 4.5% risk-free Treasuries becomes a massive drag. You assume a permanent re-rating, but retail history shows that multiple expansion rarely survives a sustained shift in the discount rate.
"The phased fee revenue may not offset the yield gap if EPS growth slips below 10%."
Gemini rightly flags the 1.5% FCF yield against 4.5% Treasuries as a real drag at 50x, yet the analysis misses how the 8.3% fee hike phases in through mid-2025 and could add $400M in margin without volume gains. If rates stay elevated, that incremental profit still leaves COST's multiple vulnerable to any 10%+ EPS slowdown, a scenario none of the prior takes quantified against the current 12% growth run-rate.
"Membership renewal elasticity post-hike is the unquantified variable that determines whether the fee windfall compounds or collapses."
Gemini's 1.5% FCF yield critique is sharp, but it assumes rates stay 'higher for longer'—a contestable premise. More pressing: nobody has quantified membership churn elasticity post-price-hike. If renewal rates drop even 2-3% while traffic stalls, the $400M fee windfall evaporates and EPS growth falls below 10%. That's the real trigger for multiple compression, not just discount rate mechanics. The fee hike is a test; we won't know the result until Q3 2025 renewal data.
"The $400M fee windfall is not durable; churn/traffic weakness could erase it and trigger multiple compression toward 30-40x instead of staying at 50x."
Responding to Gemini: I agree the 1.5% FCF yield is a real compression risk, but you overestimate the durability of the $400M margin windfall from the 8.3% fee hike. If renewal rates or traffic slip, that windfall collapses, pushing EPS growth below 10% and inviting multiple compression even with high-quality moat. In a higher-for-longer rate environment, the market may demand re-rating toward 30-40x, not automatically stay at 50x.
Despite Costco's strong business model and pricing power, the panel consensus is bearish due to its rich valuation (50x P/E) and potential risks, such as membership churn elasticity post-price-hike and a higher-for-longer interest rate environment.
Structural margin expansion through membership fee hikes, which could support EPS growth near 12% if successful.
Membership churn elasticity post-price-hike and a higher-for-longer interest rate environment leading to multiple compression.