Is Costco's $1,000 Price Tag Worth It?
"Costco Is One Of The Highest Quality Stocks, But Overpaying Can Lead To Underperformance."
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Current Price: $1005.30
Dividend / Yield: $5.20 / 0.52%
Portfolio Purpose: Growth 📉
A company I don’t currently own but continue to admire is Costco (COST). The retailer recently reported earnings, and as expected, delivered another strong quarter with double-digit growth in both revenue and earnings.
The market responded positively, pushing shares close to $1,000 per share at the time of writing.
However, with a forward P/E of 48.57x, Costco now trades at a significant premium to its historical average. While the company’s fundamentals remain exceptional, the elevated valuation raises two key possibilities:
Future returns could be muted
A potential stock split could be approaching
In this article, I break down Costco’s latest earnings, its fundamentals, and why a stock split may become increasingly likely in the near to medium term.
Previous Thesis 📖
In my previous coverage on Seeking Alpha, I downgraded Costco from Buy to Hold due to its elevated valuation.
Since September, the stock has underperformed the S&P 500 (SP500) by nearly double. Over the past 18 months, Costco shares have risen roughly 13%, while the broader index has gained approximately 24%.
The company continued delivering strong results with a fortress balance sheet, low debt, and strong cash reserves. However, I cautioned that the 31% price appreciation between January and September of 2024 could lead to a period of underperformance.
That appears to be playing out today.
Strong Quarter, But Growth Is Slowing ↗️
Costco’s latest Q2 earnings report showed the company still firing on all cylinders.
Shares rose roughly 2% following the report, bringing the stock close to $999 per share.
Yet despite the strong results, the stock remains down roughly 3% over the past year. In my view, this has less to do with fundamentals and more to do with valuation.
Back in December, shares briefly dipped to around $850, offering a much more attractive entry point for long-term investors.
Key highlights from the quarter:
EPS: $4.58 (beat estimates by $0.04)
EPS growth: +13.9% year-over-year
Net income: $2.04 billion (+13.8%)
Revenue: $69.6 billion (+11.35%)
Margins also improved modestly:
Gross margin: 11.02% vs 10.85% last year
Comparable ticket growth increased slightly:
3.5% vs 3.2% prior year
However, some metrics showed deceleration:
Adjusted comparable sales: 6.7% vs 9.1% last year
Comparable traffic: 3.1% vs 5.7%
Digitally enabled comparable sales: 21.7% (down 50 bps)
Overall, the quarter remained strong, but the slowdown suggests consumer spending may be softening, likely due to higher interest rates and macro uncertainty.
Membership Growth Remains A Major Driver 💳
A major pillar of Costco’s business continues to be membership growth, which remains extremely strong.
Membership income increased approximately 14% year-over-year.
Paid memberships grew from 78.4M to 82.1M
Total cardholders reached 147.2M
However, growth rates also slowed here:
Membership growth: 4.8% vs 6.8% last year
Cardholder growth: 4.7% vs 6.6%
Again, growth remains strong — but the trend suggests moderation rather than acceleration.
Why Costco Is Viewed As A Safe Haven ☁️
Costco’s reputation as a defensive retailer continues to attract investors during periods of macro uncertainty.
Its business model revolves around low prices, high volume, and loyal membership customers.
Consumers rely on Costco for everyday necessities, including:
Groceries
Household items
Clothing
Pharmacy
Jewelry
Top sales categories this quarter included:
Gold & Jewelry
Toys
Housewares
Pharmacy
In times of economic uncertainty, these categories tend to remain resilient.
Beyond its business model, Costco’s financial strength is a major draw for investors.
Balance Sheet Highlights ⚖️
Cash & equivalents: $17.4B
Long-term debt: $5.7B
Credit rating: AA
Cash generation remains extremely strong.
Operating cash flow: $7.7B (up from $6B)
Free cash flow: $4.87B (up from $3.6B)
Costco paid $1.15B in dividends, resulting in a payout ratio of roughly 24%.
While the dividend yield is only about 0.5%, Costco has historically rewarded shareholders with special dividends, including the $15 special dividend paid in late 2023.
I also expect the company to announce another double-digit dividend increase, potentially bringing the quarterly dividend into the $1.40–$1.45 range.
A Potential Stock Split? ⛓️💥
One of the most interesting questions surrounding Costco right now is whether the company could eventually split its stock.
The last time Costco conducted a stock split was 26 years ago, when it completed a 2-for-1 split.
Today, the market environment is very different.
Retail investing has exploded, and accessibility has become increasingly important.
With shares approaching $1,000, a split could:
Improve accessibility for new investors
Increase liquidity
Boost sentiment
Costco currently trades at a forward P/E above 48x, significantly above its historical average.
A split could potentially reignite investor enthusiasm, particularly among younger investors entering the market.
Other companies have taken similar steps recently.
Examples include:
Walmart (WMT) – 3-for-1 split in 2024
NVIDIA (NVDA) – 10-for-1 split in 2024
Netflix (NFLX) – split in 2025 after shares approached $1,100
Costco may not follow the same path, however.
Management has historically indicated they prefer rewarding shareholders through special dividends rather than stock splits.
Still, with shares nearing $1,000, the possibility is becoming harder to ignore.
Valuation Compared To Peers 📊
Costco currently trades at a much higher valuation than its peers.
Forward P/E ratios:
Costco: 48.0x
Walmart: 42.0x
Target: 15.0x
BJ’s Wholesale (BJ): 21.0x
While Costco deserves a premium due to its consistent execution and strong brand, a multiple near 50x earnings could result in more muted returns going forward.
If the stock were to revert closer to its historical valuation, investors could experience downside during a market correction.
Risks To Watch ⚠️
Despite Costco’s strengths, there are several risks investors should monitor.
1. Valuation risk
With such a high multiple, even minor disappointments could trigger a pullback.
2. Economic slowdown
If unemployment continues rising or consumer spending weakens, sales growth and membership growth could slow further.
3. Geopolitical tensions
Escalating conflict, such as the ongoing U.S.–Iran tensions, could drive inflation higher and impact consumer spending.
In a recession scenario, Costco could still perform better than most retailers — but its valuation could compress.
Bottom Line ✅
Costco remains one of the highest-quality retailers in the world.
The company continues delivering:
Strong earnings growth
Loyal membership expansion
Exceptional cash generation
A fortress balance sheet
However, the stock’s rich valuation makes it difficult to justify new purchases at current levels.
Investors may want to consider:
Buying during sharp price dips, like the drop to $850 in December
Waiting for a potential stock split
For now, Costco remains a company that is too expensive to buy — but too good to sell.
Will Costco do a stock split in 2026? Let me know in the comments.
Happy Investing!
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Not financial advice. For educational purposes only. I am not a licensed professional. Do your own due diligence.
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