Where Will Costco Stock Be in 3 Years?

Source The Motley Fool

Costco Wholesale's (NASDAQ: COST) stock rallied nearly 80% over the past three years as the S&P 500 advanced about 30%. The warehouse retailer outperformed the market as it impressed investors with its consistent growth and resistance to economic headwinds.

But can Costco stay ahead of the market over the next three years? Below is a review of its business model, expected growth rates, and valuations so you can decide.

A shopper pushes a cart in a warehouse store.

Image source: Getty Images.

What happened to Costco over the past three years?

Costco leverages its scale to buy and sell its products at much lower prices than many other brick-and-mortar retailers. It also encourages its customers to make bulk purchases of products to save money.

It can afford to sell its products at such low margins because it's a members-only warehouse club that generates most of its profits from its higher-margin membership fees. It also consistently opens more warehouses to reach new shoppers.

Therefore, Costco's core business will remain healthy as long as it grows its comparable-store sales, gains new members, maintains high renewal rates, and keeps opening new warehouses. Here's what happened over the past three fiscal years.

Metric

Fiscal Year 2022

Fiscal Year 2023

Fiscal Year 2024

Adjusted* comps growth

10.6%

5.2%

5.9%

Total cardholders

118.9 million

127.9 million

136.8 million

Worldwide renewal rate

90.4%

90.4%

90.5%

Total warehouses

838

861

891

Data source: Costco. Chart by author. *Excludes fuel and currency exchange variences. Latest fiscal year ended on Sept. 1, 2024.

Costco also raised its membership fees for the first time in seven years this September. Those higher fees should counter inflation, offset the company's logistics costs for its e-commerce business, and support its recent wage hikes in the U.S. and Canada.

What will happen to Costco over the next three years?

In fiscal 2025, Costco plans to open 29 new stores (including three relocations), with 12 new stores for the U.S. market. It also expects to start recognizing the benefits from its higher membership fees in the second half of the year.

From fiscal 2024 to fiscal 2027, analysts expect Costco's revenue to grow at a compound annual growth rate (CAGR) of 7% as its earnings per share (EPS) rise at a CAGR of 10%. That stable outlook suggests it will remain an evergreen investment as it continues to grow its comps, lock in new members, and open new stores.

By comparison, analysts expect Walmart -- which competes against Costco with its Sam's Club warehouses -- to grow its revenue and EPS at a CAGR of 5% and 17%, respectively, from fiscal 2024 to fiscal 2027 (which ends in January 2027).

Does Costco deserve its premium valuation?

Costco's core business looks healthy, but its stock is richly valued at 56 times this year's earnings. Walmart trades at 40 times this year's earnings, while its smaller warehouse rival, BJ's Wholesale, trades at just 25 times this year's earnings.

The bulls will argue that Costco deserves its premium valuation because it has a wide moat, it's well-insulated from macro and competitive headwinds, and it will keep growing at a steady rate for the foreseeable future. The bears will argue that Costco's valuations were inflated by a flight toward safe-haven stocks over the past few years, as well as the market's recent rally in anticipation of lower interest rates. Costco's low forward dividend yield of 0.5% also won't attract any serious income investors.

Is it the right time to buy Costco's stock?

Costco is a reliable long-term investment, but it's priced for perfection right now. Investors can gradually accumulate Costco's stock today but shouldn't be surprised if it gets a bit cheaper during a market downturn over the next three years.

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*Stock Advisor returns as of December 9, 2024

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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