Is it too late to buy Costco stock?

For the past 20 years, S&P500 The return including dividends is 557%. On an annual basis, this healthy rate of increase is in line with the historical 10% annual increase in the broad index.

However, some individual companies are eclipsing this performance. costco wholesale (Fee 0.75%)One such company is , a large warehouse club operator.this tops retail inventory It has soared 2,750% over the past 20 years, including dividends, and now has a market capitalization of $330 billion.

Given Costco’s impressive profits and strong valuation, is it too late to buy the company’s stock?

Still growing

Costco’s net sales for fiscal year 2023 (ending September 3) were $238 billion, making it the world’s third-largest retailer. walmart and Amazon. This number is a 72% increase from just five years ago. According to Wall Street analyst forecasts, Costco’s revenue is expected to grow at an average annual rate of 6.1% from 2023 to 2026. There is still room for growth.

Benefiting from economies of scale, profits grew even faster.of Operating profit margin It was 2.9% in fiscal 2013, but increased to over 3.3% in the most recent fiscal year. This seems like a small change, but when you’re dealing with huge amounts of revenue, it’s a big change for Costco.

As of February 22nd, Costco has 875 stores worldwide. Management plans to open 31 net new warehouses this fiscal year, with a key focus on overseas expansion, particularly in China.

While this growth has been impressive, I think it’s unreasonable to expect Costco to maintain its historical pace. In other words, the company is in a mature stage of its lifecycle, so it’s best to expect more muted profits going forward.

unique business model

Costco may operate in a boring industry, but its business is unique in the cutthroat retail world. Customers must pay an annual fee to obtain membership to shop at the company’s stores. Last year alone, he earned $4.6 billion, an 8.4% increase over the previous year. The current number of member households is 72 million.

Costco is able to sell its products at the lowest prices by having a predictable, recurring, and highly profitable revenue stream. The company’s typical markup on its products is only 11%, much lower than other major retailers. For shoppers, these savings more than offset the cost of the annual fee.

Operating a membership model fosters Costco’s customer loyalty and persistence, and protects Costco from competitive threats. Despite Amazon’s rapid growth over the past decade, especially with its Prime membership offering, Costco has continued to report strong fundamentals.

high appraisal

With the market hitting new all-time highs, it’s no surprise that some stocks are in record territory. Costco stock is already up 13% in the first two months of 2024.

To be clear, this stock is not cheap.is traded at stock price earnings ratio 50.7’s. It is selling at the most expensive level since the turn of the century. And this is a significant premium compared to the past 10-year average of 33.7.

The current valuation seems to have very high expectations. This doesn’t necessarily mean it’s too late to buy this stock. This means investors who want to add Costco will need to be patient until a more attractive entry point emerges.

But that day may or may not come, given that the market is well aware of what a great business this is.