Is Costco a Buy, Sell, or Hold in 2025?

Costco (NASDAQ: COST) has delivered fantastic growth in recent years thanks to its ability to offer customers bargain prices on everything from food to gas. The warehouse giant has seen annual revenue soar more than 50% over the past five years to $254 billion, and the stock price has followed, advancing more than 200%. The stock even reached record levels earlier this year, surpassing $1,000 for the first time.

But in recent weeks, Costco has slipped with the overall market amid concerns about the impact of President Trump's import tariffs on earnings and the economy. The tariffs are a particular worry for retailers like Costco that import certain products -- which soon may be more expensive -- and at the same time promise customers low prices.

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Considering these positive and negative points, is Costco a buy, sell, or hold in 2025? Let's find out.

Image source: Getty Images.

How Costco generates profit

Before answering that question, it's important to consider Costco's business model. The company may generate colossal amounts of revenue through the sales of groceries, general merchandise, and more -- but the interesting thing about this player is it makes most of its profit before you even start your shopping trip. And that's through membership fees, which are very high margin for Costco.

For example, in the recent quarter, Costco generated $62 billion in net sales, but merchandise costs totaled $55 billion. However, membership fees, which brought in $1.1 billion, don't involve much expense for the company.

This is positive because it shows us that, all along, Costco hasn't made an enormous amount of profit from the sales of actual goods. It buys in bulk, allowing it to access the lowest possible prices, then sets its own prices at low levels so that you as a customer will benefit. Costco won't make a fortune off your shopping trip, but it will make a high level of profit year after year as you and others continue to renew memberships and pay that annual fee.

Potential impact of Trump's tariffs

So, in the case of tariffs, they aren't weighing directly on Costco's major profit driver. Another positive point is the following: Costco says about a third of its U.S. sales relies on imports, and of that, items from the Trump-targeted countries of China, Canada, and Mexico represent less than half. The president initially announced tariffs on imports from those three countries, though he later broadened the plan.

Of course, Costco will face the challenge of setting prices to offer consumers a bargain without resulting in pressure on its own earnings. But the points I've just mentioned suggest Trump's tariffs still may have limited impact on the warehouse giant.

Now here's one more important thing about Costco's business model at times like these, when investors and consumers are worried about economic growth. Since customers already have paid a fee to shop at Costco, they probably will shop there as much as possible to get their money's worth. And since Costco generally offers the lowest prices around, it's likely that particularly during tough times, consumers will renew their memberships to gain access to these dirt cheap prices. Costco has a positive renewal rate track record, with rates generally surpassing 90%.

All of this means Costco actually may see earnings hold up well if the economic backdrop weakens. A look at earnings through past recession periods, as seen in the following chart, supports this idea. The shaded areas indicate recessions.

COST Revenue (Annual) data by YCharts

Should you buy Costco stock?

Now, let's return to our question. Is the stock a buy, hold, or sell in 2025? Well, we don't yet know if the uncertainty we're seeing in the market right now will last -- or whether the economy will stall or flourish this year. But in any of those scenarios, Costco could at least manage and in the best scenario thrive. And most importantly, over time, this retailer has what it takes to continue growing.

Today, the stock trades for 52 times forward earnings estimates. That isn't cheap, but Costco is worth the price thanks to its earnings track record and ability to keep customers coming back year after year. And valuation actually has declined, as a few weeks ago the stock traded at nearly 60 times forward earnings.

So here's my answer to the question. Costco is well positioned to handle the ups and downs of this year and beyond -- so I wouldn't sell the stock and would favor holding on for the next wave of growth.

As for buying the stock, this depends on your thoughts about valuation. If you're a big bargain hunter, you probably will find better deals elsewhere right now because of recent declines in stocks across industries -- so you might hold off on buying Costco, at least for the moment. But if you don't mind paying a bit of a premium for a stock well-positioned to deliver big over the long term, Costco makes a great buy today.

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Adria Cimino 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.