Costco's Stock Is Soaring, But Is It Too Expensive?

Note: Costco FY’24 ended on September 1, 2024.

Costco’s (NASDAQ: COST) stock has been on a tear, up 40% in 2024 (calendar year) and already tacking on another 7% in 2025, easily outpacing the S&P 500’s 2% gain. What’s driving the momentum? Steady performance anchored by its membership model. In fiscal Q3 2025 (ended May 11), Costco brought in $63.2 billion in revenue and $2.5 billion in operating profit. Of that, $1.2 billion came from membership fees alone—nearly half the operating profit, and largely recurring. With inflation pressuring household budgets, Costco’s value-focused model is hitting the right note. In May 2025, sales rose 7% year-over-year—more than double the 3% growth across the broader U.S. retail sector.

On the surface, it’s a retail dream.

But here’s the catch: Costco trades at 55x earnings and 59x free cash flow, implying a meager 1.7% cash flow yield. For context, Amazon (NASDAQ: AMZN), with faster top-line growth and exposure to high-margin segments like cloud and advertising, trades at a lower multiple. Costco may boast scale, strategy, and market love—but it comes at a steep price. See Buy or Sell Costco Stock?

Costco is priced for perfection, and even slight deceleration can cause turbulence. For context, this isn’t a stock immune to volatility. Shares dropped nearly 49% during the 2008 financial crisis, 20% during the Covid-19 panic in early 2020, and 32% in the inflation-driven pullback of 2022. Investors should keep that history in mind, even as today’s fundamentals look strong.

Photo by Alexas_Fotos on Pixabay

What’s Driving the Premium?

Costco’s elevated valuation is rooted in consistently strong performance. In fiscal Q3 2025, the company delivered earnings per share of $4.28, up 13% year-over-year, on $63.21 billion in revenue, an 8% increase. Comparable-store sales rose 8% year-over-year, while e-commerce grew nearly 15%, excluding fuel and currency fluctuations. Membership renewal rates remained exceptional, at 92.7% in the U.S. and Canada, and 90.2% globally, while total household memberships increased by 6.6%.

In the recent quarter, Costco’s U.S. same-store sales outpaced Walmart’s (NYSE: WMT) 4.5% and far exceeded Target’s (NYSE: TGT) 3.8% decline, underscoring the warehouse model’s appeal to value-focused shoppers. The company’s high-margin, recurring membership revenue has proven especially resilient during periods of economic stress, helping fuel the stock’s recent momentum.

• Operational Scale and Supply Chain Agility 

Operating 905 warehouses globally, including 624 in the U.S., Costco maintains its pricing edge through razor-thin margins and the efficiency of its private-label brand, Kirkland Signature. In Q3, shopping frequency rose 5.2%, while the average ticket increased just 0.4%, indicating that traffic—not price inflation—is driving growth.

Costco’s agile supply chain helped it navigate rising tariffs by rerouting shipments and shifting sourcing. With two-thirds of merchandise sourced domestically and just 8% of U.S. sales tied to China, its exposure to trade risks remains limited. The company is also localizing Kirkland production and benefiting from steady demand in essentials like groceries and gas. Its scale amplifies pricing power, key to sustaining its premium valuation.

Great Business, Stretched Valuation

Costco remains a top-tier operator, but its lofty valuation appears disconnected from its fundamentals. Revenue growth is solid but not explosive, hovering in the low teens. Store expansion is slowing—less than 3% this fiscal year—and some new locations may cannibalize existing sales, signaling a maturing footprint. The current premium assumes elevated growth will continue. If comparable sales normalize to mid-single digits, investor confidence—and Costco’s multiple—could face pressure.

Investing in a single stock carries inherent risks. On the other hand, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

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