Costco's Premium Price: A Smart Buy Ahead of Q2 Earnings?

Investors often ask: Is a stock worth its premium price when growth is already baked into the valuation? For Costco Wholesale (NASDAQ: COST), the question looms large as its stock nears $1,025 per share—a milestone hit in May 1025—amid rising expectations ahead of its Q2 earnings. Let’s dissect whether the premium is justified.

Recent Performance: Growth Machine or Overhyped?

Costco’s recent results are hard to ignore. In Q1 2025, net sales rose 7.5% to $60.99 billion, fueled by 7.1% comparable sales growth across its global warehouses. Membership fee revenue hit $1.17 billion, a critical metric given the $15 hike in annual membership fees implemented in late 2024. Despite the price increase, renewal rates stayed robust: 92.9% in the U.S./Canada and 90.5% globally.

Q2 2025 data reinforces the momentum. Net sales surged 9.1% to $62.53 billion, with e-commerce sales up 20.9%—a key battleground against Amazon and Walmart. Even as inflation pressures linger, Costco’s “everyday low pricing” strategy and bulk buying power have kept members loyal.

Valuation: Is the Price Too Rich?

Costco trades at a P/E ratio of 60x, nearly double the broader market’s average and far above retail peers like Walmart (15x) or Target (22x). Its EV/EBITDA of 35.4x is nearly four times the sector median of 8.7x, signaling investors are paying a steep price for its growth.

Yet, Costco’s defenders argue these multiples are justified. Its membership model generates recurring revenue, with over 140 million cardholders and a 90%+ renewal rate. The company’s $12.36 billion in cash and 28 new warehouses planned this year suggest it can fuel global expansion without over-leveraging.

Analyst Consensus: Bullish but Cautious

Analysts are split but mostly constructive. The average 12-month target is $1,077, with UBS’s $1,205 price target highlighting upside potential. Bulls cite:
- Membership fee tailwinds: The $15 hike contributed 3% to fee revenue in Q2, with minimal churn.
- E-commerce dominance: A 20.9% sales jump in digital channels underscores its ability to compete online.
- Global expansion: New warehouses in Asia and Latin America could unlock untapped markets.

However, bears warn of risks:
- Margin pressures: Wages and tariffs (e.g., on Mexican imports) could squeeze profits.
- Valuation gravity: A P/E of 60x leaves little room for disappointment.

The Case for Buying Now

Despite the premium, three factors make Costco a compelling long-term bet:
1. Defensible moat: No rival replicates its “no frills, high volume” model. Members pay extra for convenience, and the Kirkland Signature brand (now a $10 billion business) locks in loyalty.
2. Cash flow resilience: Even in recessions, Costco’s $18 billion in operating cash flow (LTM) suggests it can weather downturns.
3. Underappreciated upside: Analysts project 7% annual sales growth over the next decade, with membership fees alone hitting $5.5 billion by 2026.

The Bottom Line: A Buy for Patient Investors

Costco’s stock is undeniably expensive. But for investors with a 5+ year horizon, the math works: a company with sticky revenue streams, a global expansion playbook, and a track record of beating expectations justifies its premium.

Act now if:
- You’re willing to ride volatility tied to Q2 earnings.
- You believe Costco’s “value for members” strategy outpaces inflation and competition.

Historically, this strategy has been rewarding. Buying Costco shares five days before quarterly earnings and holding for a month since 2020 has delivered an average return of 12.88%, though with a maximum drawdown of 16.5%. The risk-adjusted return (Sharpe ratio of 1.11) suggests it can be effective for those willing to weather short-term swings.

Avoid if:
- You need short-term gains; this is a multi-year story.
- You’re a skeptic of the membership model’s scalability.

The verdict? Costco remains a buy, even at $1,000+. The question isn’t whether it’s overvalued today—it’s whether its membership-driven flywheel can keep spinning faster tomorrow.

Final Call: Hold for the long term. The premium is steep, but the growth engine isn’t done yet.