Costco: A Scalable Growth Machine for the Long-Term

Costco's membership model is the core of its durable growth engine, and recent data shows it's gaining momentum. The company's membership fee income jumped 14% to $1.33 billion in its first quarter, a figure that underscores the model's resilience. This growth was driven by a 5.2% year-over-year increase in paid households to 81.4 million, demonstrating steady market penetration. The strength is even more pronounced in higher-tier memberships, where executive memberships rose 9.1% to 39.7 million, now representing a dominant 74.3% of total sales.

This isn't just about adding members; it's about deepening their lifetime value. The model's predictability is reinforced by high renewal rates, with a 92.2% renewal rate in the U.S. and Canada. The combination of pricing power, expanding household counts, and a shift toward premium tiers creates a scalable profit stream that operates with remarkable efficiency.

The financial market is starting to notice this momentum. After a rough year, Costco stock has shown a clear reversal, gaining 8.2% over the past five days and 5.8% over the past 20 days. This recent price action suggests investors are beginning to price in the company's ability to capture market share through its membership flywheel. The setup is clear: a proven model for recurring revenue is now backed by visible growth in its customer base, which could drive sustained market share gains and justify the stock's premium valuation.

Scalability & Total Addressable Market (TAM)

Costco's growth runway extends far beyond its U.S. base, and the numbers show a company successfully scaling its model internationally. The company's global comparable sales grew 6.4% last quarter, a solid pace that masks significant regional variation. The standout performer was Canada, where adjusted comparable sales surged 9.0%. This high-growth segment is a key lever for expanding the total addressable market, demonstrating that the membership flywheel can replicate its success in developed economies with similar consumer profiles.

The company is also strategically expanding its product mix to capture more value per member and drive online penetration. A major shift toward higher-margin "big and bulky" items-like furniture, saunas, and outdoor goods-is central to this plan. This isn't just about adding new categories; it's a calculated move to leverage Costco's trusted brand and delivery network. As one executive noted, these purchases are a good way to drive business online and into a company app, with delivery handling the heavy lifting. This directly targets the company's digitally-enabled sales, which jumped 20.5% last quarter, a clear sign that the product mix is successfully pulling customers into the higher-margin digital channel.

This strategic pivot is also making new stores more profitable from day one. The company has refined its model so that new warehouse openings now generate an estimated $192 million in revenue per club, a notable increase from $150 million two years prior. This improvement in the unit economics of expansion is a critical scalability win. It means each new club contributes more capital efficiently, accelerating the return on investment and allowing Costco to deploy its growth capital more aggressively into new markets, both internationally and domestically.

Together, these points paint a picture of a scalable growth machine. The company is capturing market share in high-growth international segments, diversifying its revenue with higher-margin products that fuel online sales, and making its physical expansion more efficient. This multi-pronged approach significantly broadens the total addressable market beyond traditional grocery, positioning Costco for sustained, high-quality growth.

Digital Momentum and International Growth

The path to capturing new market segments for Costco is being paved by two powerful, scalable vectors: a digital sales surge and the vast untapped potential of international expansion. Together, they represent the company's most direct routes to accelerating revenue growth beyond its core U.S. base.

The digital channel is the standout growth engine. Digitally-enabled sales, which include online purchases and in-warehouse pickup, jumped 20.5% year-over-year last quarter. This acceleration is not a side project; it's a core strategic lever. By pushing higher-margin "big and bulky" items online, Costco is successfully pulling members into its digital ecosystem, where it can capture more value per transaction. This channel's rapid growth directly feeds the company's scalability, as it allows for revenue expansion with less incremental physical footprint than opening new warehouses.

At the same time, the international market remains a massive, largely untapped Total Addressable Market. As of the last report, Costco operates in just eight countries, with a global footprint of 923 warehouses. This concentration means the company has significant room to scale its membership model in developed economies like the UK, Japan, and Canada, where it already sees strong comparable sales growth. The international segment's adjusted comparable sales of 8.8% last quarter, led by Canada's 9.0% surge, shows the model's replicability. Each new market represents a fresh pool of potential paid households, directly expanding the TAM without relying solely on domestic saturation.

This dual-track growth strategy is gaining strong analyst validation. In recent days, Mizuho upgraded the stock to 'Outperform' and raised its price target to $1,000, while Telsey maintained its 'Outperform' rating with a $1,100 price target. Their positive sentiment reflects a clear view that Costco's scalable model-driven by digital penetration and international expansion-is poised to capture these new segments efficiently. The business model's inherent simplicity and capital efficiency, which have fueled decades of compounding, appear well-suited to replicate this success across borders and digital channels.

Valuation & Catalysts for Growth

Costco's premium valuation is the central tension for investors. The stock trades at a price-to-earnings ratio of 47, a multiple that prices in near-flawless execution. This high bar is justified by the company's robust growth, with total sales rising 8.2% year-over-year last quarter and membership fee income climbing 14%. Yet, even after a weak year for the stock, the price remains difficult to justify. The setup is clear: the business is strong, but the market is demanding perfection.

The primary catalyst for justifying this premium is continued international expansion. Costco's growth is no longer confined to its mature U.S. market. The company is actively scaling its model into new countries, where it still has significant room to expand. This international vector represents a vast, untapped Total Addressable Market. The strong momentum in existing international segments, like Canada's 9.0% comparable sales surge, demonstrates the model's replicability. Each new market adds a fresh pool of potential paid households, directly fueling the membership flywheel and driving the high-quality fee income that grows faster than sales. Successfully penetrating these new geographies is the clearest path to accelerating revenue growth and validating the current valuation.

However, this growth path is not without material risks. The most significant threat is intensifying competition. Rivals like Sam's Club and Kroger are formidable competitors who could replicate Costco's model or target its core membership base. Sam's Club, backed by Walmart's immense scale, is a direct threat in the warehouse club space. Meanwhile, grocers like Kroger and BJ's Wholesale could make inroads on Costco's turf, particularly in grocery and membership services. This competitive pressure could cap margins, slow membership growth, or force costly promotional responses, all of which would challenge the high growth rates the premium valuation assumes.

The bottom line is that Costco's stock is a bet on flawless execution of its scalable growth plan. The valuation leaves little room for error, making the company vulnerable to any stumble in its international rollout or a shift in competitive dynamics. For the premium to be justified, the company must continue to capture market share abroad while defending its domestic fortress. The catalysts are clear, but the risks are equally tangible.