Is Costco's Stock Overvalued? Here's Why the High Price Might Still Be Worth It

The debate over Costco Wholesale (COST)'s valuation has reached a fever pitch. With its stock price soaring over 30% in the past year and valuation metrics like the P/E ratio hitting historic highs, skeptics argue the shares are a bubble waiting to burst. But beneath the surface, there's a compelling case that Costco's premium price tag is justified—and that investors who back away now could miss out on decades of compounding power.

The Numbers That Scare—and Why They Might Be Misleading

Let's start with the metrics that give pause. Costco's forward P/E ratio of 54.35 is nearly double its 10-year average of 34.03, while its EV/EBITDA of 37.11 sits far above the industry norm. These figures scream “overvalued” to traditionalists. But here's the catch: Costco isn't a traditional company.

First, consider the denominator in these ratios. Costco's net income of $7.84 billion and EPS of $17.63 are not static. Its 5-year revenue growth forecast of 7.23% and EPS growth of 10.70% suggest these figures will keep climbing. A would show that while the P/E is high, it's tracking with—or even lagging—its earnings trajectory.

Second, the company's $6.67 billion net cash position and ROE of 32.08% underscore its financial resilience. Even the dividend cut—a 75% reduction from 2024—has a silver lining: it's a strategic shift to reinvest in growth rather than overpromise payouts. With a payout ratio of just 29.5%, dividends can rebound as earnings grow.

Why Costco's Growth Machine Is Built to Last

Costco's moat isn't just its warehouse format—it's the $70 billion in membership fees it collects annually, with 91% of members renewing each year. This recurring revenue stream acts as a cash engine, funding expansion into markets like India and Indonesia, where it's on pace to open 50 new stores by 2030.

The company's marginal cost advantage is another secret weapon. With $807,135 in revenue per employee, it operates leaner than peers, and its ROIC of 18.99% ensures capital is deployed efficiently. Meanwhile, the Altman Z-Score of 9.44 (well above the 3.0 bankruptcy threshold) and Piotroski F-Score of 7 confirm its balance sheet is bulletproof.

The Analysts Are Wrong—Here's Why

The average price target of $1,044.93—slightly below today's price—ignores the compounding power of membership growth and international expansion. Analysts often anchor to outdated multiples, failing to grasp that Costco isn't just a retailer; it's a subscription-based loyalty platform with 120 million members globally.

Consider this: Even if the P/E contracts to its 10-year average of 34, the stock would still need to grow earnings at 10% annually for the next decade to justify today's price. Given its track record and untapped markets, that's a conservative bar.

The Bottom Line: Pay Up Now—or Pay Later

Costco's valuation isn't a flaw—it's a feature. The stock's 50-day moving average of $985.52 and 200-day average of $950.60 reveal a trendline pointing skyward. Investors who demand “cheap” multiples here are missing the point: this isn't a cyclical stock. It's a structural winner in an era of inflation and subscription-driven commerce.

The -1.01% gap between today's price and the target isn't a warning—it's a buying opportunity. If you wait for a “discount,” you'll miss the next wave of membership sales, automation upgrades, and emerging market dominance.

Act now. The math favors Costco's shareholders for years to come.