Is Costco Stock a No-Brainer Buy for 2025?

Costco Wholesale (NASDAQ: COST) has emerged as one of the world's most successful retailers. Its strategy of selling high-quality bulk goods at competitive prices and razor-thin margins has built the company a loyal customer base.

However, Costco's focus on offering the lowest possible prices does not necessarily apply to its stock. Thus, investors need to take a closer look at the company and its financials to know whether Costco will be an obvious buy in 2025.

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Costco's business

Few can argue with the success of Costco. For the cost of a membership (which starts at $65 annually in the U.S.), customers have access to its warehouses, which offer a wide variety of desired goods.

Costco competes by profiting from the membership fee. It then offers its goods primarily in bulk and sells them for little more than the cost of goods sold plus overhead. This strengthens Costco's competitive advantage as it can afford to sell goods at competitive prices.

Additionally, Costco has succeeded where retailers like Walmart (NYSE: WMT) and Home Depot (NYSE: HD) have failed -- expansion outside of North America. Approximately 30% of its nearly 900 warehouses are outside of the U.S., and its strategy of selling desired bulk goods has transcended the cultural challenges that often derailed the expansion plans of its competitors.

So successful is this approach that 93% of U.S. members and 90% of members globally renew memberships yearly. Also, despite the $5 per year membership price increase in September, Costco said it had an "immaterial" impact in the first quarter of fiscal 2025 (ended Nov. 24, 2024). Since membership fees are Costco's primary source of profit, this bodes well for its financials.

Investing in Costco by the numbers

Unfortunately for prospective investors, Costco's success is a known quantity, and that has made the stock expensive by nearly every measure. That has not stopped investors from buying Costco stock. It currently sells near all-time highs, and in the last year alone, it rose by around 40%.

Nonetheless, this also means its valuation is also near all-time highs. The stock currently trades at a P/E ratio of 58, a level it has achieved at no other time in its history. That would presumably leave the stock with little upside and possibly significant downside if the sentiment were to turn negative.

Investors are probably right to question whether it justifies such a valuation. In fiscal Q1, revenue of $62 billion rose about 8%, which is higher than the 5% revenue increase in fiscal 2024 (ended Sept. 1, 2024). Also, only $84 million of that Q1 2025 increase came from increased revenue from membership fees, meaning it had only a minimal impact on revenue.

Also, in fiscal Q1, that increase meant a higher cost of goods sold, and its selling, general, and administrative expenses surged by 9%. Additionally, Costco benefited from a modest drop in income tax expenses, translating into a quarterly net income of $1.8 billion. That was a 13% yearly rise, though it was also a slowdown from the 17% profit growth in fiscal 2024.

The question for investors is whether that increase justifies its valuation. While that amounts to a significant increase in profits, it may not support a premium price for this company's stock.

Should I buy Costco stock in 2025?

Under current conditions, Costco stock is not a no-brainer for 2025. Indeed, Costco is one of the more successful companies in retailing, and that is unlikely to change anytime soon.

However, even the most successful retail stocks are only worth so much. Despite the double-digit increase in its net income percentage, that does not appear to be enough to justify its 58 P/E ratio. That valuation could set Costco stock up for a steep decline if investors find the slightest imperfection in its earnings news.

Ultimately, with more potential downside than upside for its stock, investors are likely better off staying on the sidelines for now.

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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Home Depot, and Walmart. The Motley Fool has a disclosure policy.