Costco Stock at $892: Here's What History Says Comes Next

Most of the market's attention has gravitated to the artificial intelligence (AI) boom. But Costco Wholesale (NASDAQ: COST) is out to prove that sizable wealth can be made in boring industries. Investors don't have to just stick to the technology sector.

In the past decade, shares have risen 486% (as of Sept. 17). Including dividends, they have generated a total return of 594%. The market has soured on the retail stock since May, as it has fallen 18% below its peak.

Costco now trades at around $892 per share. Investors might be inclined to buy the dip in a perennial winner. Here's what history says comes next.

No discounts

Despite trading well off its all-time high, Costco remains an expensive stock. It currently trades at a price-to-earnings (P/E) ratio of 44.9. By comparison, the S&P 500 index carries a 23.2 P/E multiple. Costco is at a 94% premium to the benchmark.

Betting on the AI revolution has been a popular way to make money in recent years. The dominant AI stock is Nvidia. It trades at a P/E ratio of 27.8. And its net income has skyrocketed at a compound annual rate of 2,415% over the past five years, astronomically higher than the 80% pace that Costco registered.

The warehouse club operator is pricier than arguably the most prosperous business in the world today, Nvidia. This might come as a shocking realization.

The last time Costco shares traded at a P/E multiple of 44.9 was at the start of 2024. Over the following 12 months, the stock price surged 39%.

On the surface, this is an encouraging data point that might indicate the coming year will result in a huge return for shareholders. Investors shouldn't jump to any conclusions about this single sample, however, as it looks at a very short time horizon. In the market, anything can happen over a one-year period, especially as investor sentiment is always changing.

Valuation or quality

When evaluating an investment candidate, the ideal situation is to buy a high-quality business trading at a cheap valuation. We already know that Costco does not pass the test when it comes to the latter criterion.

But what about the quality test? Here's where the company stands out. Costco is an outstanding business. There are three variables that support this argument.

The company has developed a powerful cost advantage. Its colossal scale, as shown by third-quarter (ended May 10) net sales of $69.2 billion, makes it one of the largest retailers in the world. But because Costco deliberately caps the number of unique items it sells in its stores, it is probably the single biggest buyer of merchandise from its suppliers.

This setup gives it negotiating leverage that smaller rivals can't match. Members benefit with constant low prices on goods.

Another reason to like this business is durable demand trends. A good case can be made that Costco is a recession-resilient enterprise. Households need to keep buying the merchandise it sells in both favorable and adverse economic periods.

It's no wonder that same-store sales have consistently grown over the years. Even during fiscal 2020, the year that the COVID-19 pandemic shocked the economy, this key metric rose by 7.7%.

And finally, Costco has proven that it can steadily increase its profits over the long term. Investors should hone in on companies that are expected to report higher earnings in the future, as this supports growing intrinsic value.

Costco continues to open 25 or so net new warehouses every year. The bottom line is set to keep expanding as a result.

At the current P/E multiple of nearly 45, this large-cap stock doesn't provide a margin of safety for long-term investors. But this is an excellent business with a cost advantage, durable demand, and steadily rising profits that investors should keep tabs on.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Nvidia. The Motley Fool has a disclosure policy.