Why Costco (COST) Is Still a Strong Buy for Long-Term Investors, Despite Valuation Concerns

In an economic climate marked by inflationary pressures and retail sector volatility, Costco Wholesale (NASDAQ: COST) stands out as a rare combination of defensive resilience and growth potential. Despite concerns over its elevated price-to-earnings (P/E) ratio, the company's strategic innovations, membership-driven model, and operational efficiency position it as a compelling long-term investment. This analysis synthesizes insights from institutional analysts, retail investor sentiment, and Costco's recent strategic moves to argue why the stock remains a strong buy.

Institutional Confidence: Evercore ISI's Endorsement

Evercore ISI, a prominent institutional analyst, recently reaffirmed its "Outperform" rating for Costco, even as it trimmed its price target to $1,025 from $1,060. The firm underscores Costco's role as a "core holding" in a market starved of "mega cap defensive growth" stocks, particularly amid tariff-driven retail challenges. Key drivers include:
- Compounding Traffic and Membership Gains: Costco's ability to consistently grow its membership base-critical to its recurring revenue model-has offset broader retail headwinds. High renewal rates (over 90%) reflect its value proposition.
- Margin Resilience: Despite rising input costs, Costco has maintained solid gross margins through supply chain optimization and scale-driven purchasing power.
- Defensive Characteristics: The company's focus on essential goods and services makes it less susceptible to discretionary spending shifts, a critical advantage in inflationary environments.

Evercore ISI's analysis highlights that Costco's business model is not just about short-term gains but long-term compounding through its membership ecosystem and operational discipline.

Retail Investor Sentiment: Optimism Amid Caution

Retail investors on platforms like Reddit have echoed institutional optimism, albeit with nuanced concerns. As of 2025, Costco holds a positive investor sentiment score of 70–71 out of 100, placing it in the 72nd percentile relative to peers. Key themes from retail forums include:
- GLP-1 Drug Initiative: Costco's partnership with Novo Nordisk to offer Ozempic and Wegovy at $499 per month-far below list prices-has been hailed as a game-changer. This move not only diversifies revenue streams but also enhances membership value, attracting health-conscious consumers.
- Extended Hours Strategy: The rollout of early shopping hours for Executive members (e.g., 9:00–10:00 AM weekdays) has been controversial but effective in managing foot traffic and boosting sales. CEO Ron Vachris noted these changes added approximately 1% to weekly U.S. sales.
- Valuation Concerns: Critics point to Costco's trailing P/E of 51 and forward P/E of 43.85 as expensive relative to its 6% revenue and 10% earnings growth over three years. However, proponents argue that the company's low employee turnover (a cost-saving advantage) and membership model justify the premium.

The Reddit community's cautious optimism reflects a broader recognition of Costco's adaptability in a shifting retail landscape.

Strategic Differentiation: GLP-1 Drugs and Operational Innovation

Costco's recent foray into healthcare, particularly GLP-1 drugs, exemplifies its ability to innovate while leveraging its core strengths. By offering Ozempic and Wegovy at a fixed price, Costco addresses a growing consumer demand for affordable weight management and diabetes treatments. This initiative aligns with broader government efforts to reduce GLP-1 costs (e.g., Medicare/Medicaid negotiations under President Trump), creating a complementary ecosystem. For Costco, the move diversifies revenue beyond traditional retail and strengthens membership stickiness.

Simultaneously, the extended hours strategy for Executive members has redefined the shopping experience. By incentivizing early visits, Costco reduces in-store congestion and improves operational efficiency without significant labor cost increases. The policy has also spurred membership upgrades, with Executive tiers growing in popularity. These operational tweaks highlight Costco's agility in adapting to consumer preferences while maintaining profitability.

Valuation vs. Peers: Justifying the Premium

Costco's valuation premium over peers like BJ's Wholesale Club (BJ) is stark. While Costco trades at a forward P/E of 43.85, BJ's has a much lower ratio of 19.37. This gap reflects divergent growth trajectories: Costco's earnings per share (EPS) are projected to grow 11% year-over-year in 2025, compared to BJ's 7.4%. Key differentiators include:
- Scale and Market Share: Costco's 8.6% year-over-year sales growth (October 2025) outpaces BJ's modest comparable sales gains.
- Margin Management: BJ's faces margin pressures from rising operating costs and competition from Sam's Club and traditional grocers, whereas Costco's supply chain and membership fees provide a buffer.
- Strategic Diversification: Costco's healthcare and membership-centric initiatives create moats that BJ's lacks.

While BJ's lower valuation may appeal to value hunters, Costco's premium is justified by its superior growth, operational resilience, and long-term compounding potential.

Addressing the P/E Concern: A Long-Term Lens

Critics argue that Costco's P/E ratio is stretched relative to its historical growth. However, this metric fails to capture the company's structural advantages:
- Membership Model: Costco's $130 Executive membership and $60 Gold Star tier generate predictable, high-margin revenue. With over 70 million members globally, this recurring income stream is a key driver of long-term value.
- Inflation Resistance: The company's focus on bulk, essential goods insulates it from discretionary spending volatility. Its ability to pass on cost increases without losing members further strengthens its margins.
- Healthcare Expansion: The GLP-1 drug initiative taps into a $100 billion+ market, offering a new revenue stream with high gross margins.

For long-term investors, these factors suggest that Costco's valuation is not a flaw but a reflection of its durable competitive advantages.

Conclusion: A Compelling Case for Long-Term Investors

Costco's combination of defensive characteristics, membership-driven growth, and strategic innovation makes it a rare gem in today's market. While valuation concerns are valid, they are outweighed by the company's ability to compound value through operational efficiency, margin resilience, and forward-looking initiatives like GLP-1 drugs. As Evercore ISI notes, Costco's "mega cap defensive growth" profile is in short supply-a reality that will likely keep the stock in favor among both institutional and retail investors. For those with a multi-year horizon, Costco remains a strong buy.