Costco is one of the most admired retailers in the world, and I admire it too. It is also trading at a valuation that would be aggressive for a fast-growing software company, which is a strange thing to say about a business that sells rotisserie chickens and giant packs of paper towels. The question worth asking is whether that premium is justified because Costco is that good, or whether it is the kind of thing that looks obvious right up until the multiple compresses. I think it is closer to the second, and I want to walk through why without pretending the business is anything other than excellent.
The Model Really Is Different
Costco does not make its money on the markup. It runs the merchandise close to break-even and earns its operating profit from membership fees. That structure aligns the company with the customer in a way most retailers cannot match. Every decision points toward keeping prices low so members renew, and renewal rates sit above ninety-two percent in the United States and a little lower worldwide. Once someone has paid the annual fee, they shop at Costco to get their money’s worth, which drives the traffic that lets Costco negotiate hard with suppliers, which keeps prices low, which drives renewals. It is a real flywheel, not a slide-deck one.
The company raised its membership fee in 2024, the first increase in seven years, which flows almost entirely to profit and gives earnings a multi-year tailwind as it phases in. Comparable sales have been running in the mid single digits excluding fuel, e-commerce is growing faster off a small base, and the Kirkland Signature private label keeps taking share of the basket. There is nothing wrong with the business. That is not the argument.
The Multiple Is the Whole Argument
For most of its history Costco traded in the mid twenties on earnings, occasionally drifting toward thirty in strong periods. Over the past few years it re-rated to around fifty times, and it has mostly stayed there. The Costco valuation page plots that against the stock’s own five-year band, and the current reading sits near the top of it. Nothing about the growth rate changed enough to explain the move. Earnings per share have been compounding at roughly nine to ten percent a year, which is very good for a retailer and nowhere near what a fifty times multiple usually implies. The re-rating happened because investors decided a recession-resistant compounder deserved a scarcity premium, and once a stock like that gets bid up, index and momentum flows tend to keep it there for a while.
The math from here is unforgiving. If earnings grow ten percent a year for the next five years and the multiple simply drifts back toward a still-generous thirty-five times, the stock goes roughly nowhere over that stretch despite the business performing well. To make a good return from today’s price, you need the earnings growth to hold and the market to keep paying close to fifty times. That can happen. It is just a lot to underwrite, and it is a smaller version of the question I worked through on whether the index as a whole is overvalued in 2026.
My Base Case
My base case is that Costco keeps doing what it does. Comps stay in the mid single digits, new warehouse openings add a few points of growth, the membership fee increase phases through, and earnings compound around ten percent. On top of that, the company pays occasional large special dividends when cash builds up, which adds to the total return. The part I cannot forecast with any confidence is the multiple, and at this starting point the multiple is most of the return.
| Element | My assumption | Confidence |
|---|---|---|
| Comparable sales | Mid single digits, ex-fuel | High |
| EPS growth | Around 10% per year | High |
| Membership renewal | Stays near 90%+ | High |
| Exit valuation | Anywhere from 30x to 50x | Low, and it drives the outcome |
Why I’m Not a Buyer Yet
I do not own Costco, and it is not because I think the business will stumble. It is because the price already reflects a decade of everything going right, and it leaves me no cushion for the ordinary disappointments that eventually reach every company. If I owned it from lower levels I would probably hold, since the compounding is real and selling quality over valuation has cost me before. Putting new money in here means accepting that a flat five years is a live outcome even with management executing well. The Costco quote page has the live numbers, and the quant rating tool shows the Valuation factor pulling against an otherwise strong profile. The level where I would get interested is the mid thirties on forward earnings, which the stock reached as recently as a couple of years ago. I would rather wait for that than pay for a decade of perfect execution.
Gavin Thorne writes on equity strategy and company-level research. This article reflects his personal research process and is intended for informational purposes only. It does not constitute investment advice.