Costco Wholesale Corp. (COST) has grabbed investor attention in recent years, consistently outperforming the broader market. Its unique combination of low costs, high volume, and strong customer loyalty gives it a sense of resilience, making it appear largely shielded from various external headwinds.
The big issue is that Costco stock is priced for perfection. Even though the company is relatively cushioned from potential tariff impacts related to China, any crack in its growth story could expose how stretched its valuation multiples are, leading to increased volatility or compressing further upside. With that in mind, I’m neutral on Costco and rate the stock as a Hold.
How Costco Makes Low Margins Look Good
For some time now, Costco has been the retailer that best executes the low-margin, high-volume strategy in the sector. In fact, the company is the third biggest retailer worldwide. The big-box giant consistently undercuts competitors on pricing by willingly accepting lower margins, with just a 3.7% operating margin over the last twelve months, well below the industry average of 9.6%.
In return, it drives massive revenue volumes and compensates for those thin margins through membership fees, which have a virtually 100% margin and account for the majority of the company’s profits.
Its membership fees are the secret sauce. They help offset the razor-thin product margins, allowing Costco to keep prices ultra-competitive while remaining highly profitable. By offering great prices and exclusive products under a subscription model, Costco attracts and retains tens of millions of members, with renewal rates over 90% globally and 93% in North America. In that sense, Costco is a rare case of a recurring subscription business outside of the tech niche.
However, what makes Costco stand out is how efficiently it maintains steady growth in an inherently asset-heavy business. It does this by attracting consistent investment and building strong competitive advantages, clearly reflected in its high returns on tangible assets. For instance, taking Costco’s operating income of $9.28 billion in 2024 and dividing it by its $51 billion in net fixed assets plus the negative $425 million in working capital, you get a return on investment (ROI) of 18.3%.
What’s more impressive is that this level of ROI is consistent—Costco has averaged 17.2% ROI over the past five years. That’s a strong metric, especially for a business model that is low-margin by design, heavily reliant on physical assets (warehouses, inventory, etc.), and constantly passing on cost savings to customers, limiting pricing power.
This all feeds into Costco’s flywheel effect: operational efficiency leads to low prices, which drives customer loyalty, which fuels substantial recurring revenue, and that, in turn, allows for reinvestment and continued scale. It’s a great example of how Costco has managed to leverage its physical assets and working capital to consistently generate strong, reliable operating profits, which is what really matters for long-term investors.
The High Price of Costco’s Stability
Although Costco is synonymous with low cost, its stock is anything but. The company’s excellent business qualities come at a pretty steep price—justifiably so for some investors, given Costco’s ability to consistently generate earnings while carrying relatively little risk. But in my view, everything has a limit.
For example, Costco currently trades at 55x forward earnings. Based on consensus estimates implying 9% EPS growth over the next four years, that translates to a PEG ratio of 6x, which is higher than many tech companies, including names like Tesla (TSLA).
Moreover, if you look at Costco’s operating return relative to its market value, and divide the $9.75 billion in operating income (from the last 12 months) by its $436.12 billion enterprise value, you get an earnings yield of just 2.2%. In other words, Costco is generating only 2.2 cents of operating profit for every dollar invested in the company’s total value. That’s not very compelling compared to something like the U.S. 10-year Government Bond, which is currently yielding over 4.3%—and with considerably less risk.
So essentially, by investing in Costco at these levels, you’re accepting more market risk in exchange for a potentially lower return, which might not be that attractive, especially in a higher-rate environment.
That said, it’s important to be clear: a low earnings yield doesn’t mean Costco is weak; it’s far from it. In my view, the market seems to be signaling that, despite the relatively low expected return at current prices, investors still prefer to hold Costco because they don’t see another company offering the same combination of quality, stability, and resilience, especially during periods of macroeconomic uncertainty.
The Risks of Being Priced for Perfection
Since the U.S. escalated tariffs against China earlier this month, the impacts on the macroeconomic landscape have been uncertain, especially for companies that rely on imports from China. For Costco, however, less than a third of its U.S. sales come from imported products. Specifically, less than 15% of Costco’s U.S. sales are from Chinese imports. If Costco faces a 125% tariff on a product, it could make that product uncompetitive and not even worth selling, since consumers will likely choose more affordable alternatives.
So, the impact may not be huge in Costco’s overall picture, but even if only 15% of its U.S. sales are impacted, that could be highly depressing for a company priced for perfection.
The counterargument is that this situation isn’t unique to Costco. In fact, Costco is arguably in a better position than its smaller, less agile competitors. Thanks to its strong product mix, Costco can more effectively absorb wholesale price increases. CEO Ron Vachris mentioned in the latest earnings call that the company is well-positioned to lower prices and defer cost increases, thanks to its strong relationships with suppliers.
That said, some decline in demand is still possible, which would lower Costco’s earnings potential in the future. As a result, analysts have revised down long-term growth estimates for FY2028 and FY2029 by 3.5% and 4.8%, respectively, over the past month. This revision has lowered the 5-year EPS CAGR, which could make Costco’s PEG ratio look overly stretched.
Is Costco Stock a Buy or Sell?
The consensus on COST stock is primarily bullish, though there’s plenty of room for moderation. Of the 27 analysts covering the stock, 20 are bullish while 7 are neutral. Not a single analyst is bearish on COST stock. The average price target is $1,086.58, suggesting a potential upside of 9% from the current share price over the next twelve months.
Watch Out for the COST Stock Dip
Costco’s strong business fundamentals and unique position in the retail space really speak for themselves. In recent years, they have provided a solid safe harbor for investors, resulting in significant gains. That said, considering how sky-high the valuations are, I am tentative about owning COST shares. Arguably, investors could find fixed-income assets offering more attractive risk-return profiles than Costco at current prices.
Given these factors, I’m rating Costco as a Hold. While I believe the company is well-positioned for continued long-term success, I also think a short-term correction might be on the horizon.