2 Reasons to Buy Costco Stock — and 1 Reason to Avoid it

You can tell just by a glance at its share price chart that Wall Street loves Costco Wholesale (COST -1.04%) right now. The warehouse retailer is trading near all-time highs, having jumped over 50% since early 2023. That’s a better performance than many popular tech stocks have managed during this time.

What makes investors so enamored with Costco’s business, given its relatively slow growth and low profit margin? And is there a downside to buying the stock after its recent rally? Let’s dive right in.

Shopper engagement

For most retailers, the best way to judge the engagement level of their shoppers is to examine customer traffic. Costco’s done well in this arena, with traffic up a blazing 5% worldwide and higher by 4% in the core U.S. market this past quarter.

Yet there’s an even better metric to watch in Costco’s case: the renewal rate. A record 93% of the chain’s members are paying to renew their annual subscriptions right now, up slightly compared to the prior quarter. That result is strong evidence that Costco is delivering value to its shoppers in the form of low prices and an excellent selection of merchandise. The retailer practically dares customers to cancel their memberships by offering full refunds at any point during the subscription period. Yet almost no one takes Costco up on that offer.

The company doesn’t capitalize quickly on that renewal success. It hasn’t raised its annual subscription fee in over six years, after all. But Costco’s elevated renewal rate means the next hike should be widely accepted and will deliver plenty of extra resources that management can direct toward keeping its merchandise prices low.

Finding golden opportunities

Costco isn’t struggling to find new growth opportunities, and that’s great news for its shareholders. It recently started selling gold bars through its online sales channel, sparking a nearly 20% increase in that segment last quarter. The company is aiming to extend that positive momentum through 2024, most recently by offering silver and extending partnerships with huge national brands on its e-commerce platform.

Rival Walmart just crossed $100 billion in annual e-commerce sales, and Costco seems determined to stay competitive in this growing market niche as well. It’s not hard to imagine Costco expanding its digital presence by a wide margin in 2024 and beyond using its trademark treasure-hunt selling approach to offer a wider range of consumer discretionary products to its members.

Priced for perfection

The big reason to avoid jumping into Costco shares today is their premium price. The stock isn’t often available at a big discount because Wall Street is well aware of its many competitive advantages. Yet its valuation is also unusually high right now. That’s partly due to the bull market rally that’s pushed many stocks into record territory and the fact that Costco has outpaced the S&P 500‘s recent gains by a wide margin.

As a result, you’ll have to pay 1.3 times annual sales to own this high-performing business today, close to an all-time high. Walmart and Target are priced at about half of that level, for comparison.

That elevated valuation raises the risk that you’ll overpay for Costco stock. But the warehouse giant has a habit of earning its premium with help from a steadily expanding membership base. Watch the renewal rate over the next few quarters for signs of an interruption of that virtuous cycle. But for now, the retailer seems well-positioned to continue setting sales and earnings records in 2024 and beyond.

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