Is Costco a Strategic Buy After Its 23-Year Worst Relative Performance?

The recent underperformance of Costco Wholesale (COST) has sparked a critical debate among investors: Is the stock's current valuation a mispricing that offers a strategic entry point, or does it reflect a market overestimating the company's long-term potential? With Costco trading at a price-to-earnings (P/E) ratio of 50.09 as of November 2025-32% above its 10-year historical average and significantly higher than the Consumer Defensive sector average of 20.7-the tension between valuation realism and long-term value is stark according to analysis. This analysis examines the interplay of these forces, drawing on Costco's financial fundamentals, competitive advantages, and historical performance to assess its investment appeal.

Valuation Realism: A Premium with Risks

Costco's elevated valuation metrics raise legitimate concerns. Its P/E ratio of 50.09 and price-to-book (P/B) ratio of 13.9 according to data position it as one of the most expensive stocks in the retail sector, even outpacing peers like Walmart (P/E 41.39) and Target (P/E 10.94) according to data. This premium reflects investor optimism about Costco's growth trajectory, but it also exposes the stock to margin pressures and macroeconomic headwinds. For instance, Costco's razor-thin merchandise margins-hovering below 2%-leave little room for error in a landscape marked by inflation, supply chain disruptions, and rising labor costs according to market analysis.

The current valuation also appears stretched relative to historical benchmarks. During the 2008 financial crisis, Costco's P/E ratio plummeted to 19x, a level that underscored its defensive appeal amid economic turmoil. By contrast, the 2025 P/E of 50x suggests a market that is pricing in sustained growth rather than risk mitigation. This divergence highlights a key question: Can Costco's operational resilience justify a valuation that rivals high-growth tech stocks like NVIDIA?

Long-Term Value: Fundamentals and Strategic Advantages

Despite the valuation concerns, Costco's long-term value proposition remains compelling. The company's membership-driven model, which generates 66% of its net income, provides a stable revenue stream and high customer retention. With 78.4 million paid household members and a global renewal rate of 89.8% in Q4 2025 according to data, Costco has demonstrated its ability to adapt to shifting consumer preferences. Analysts project that membership revenue will grow by 56% by 2034, potentially accounting for half of total operating income according to research.

Operational efficiency further strengthens Costco's case. Its gross profit margin increased to 12.61% in 2025 according to financial reports, while operating margins reached 3.8%-an improvement from 3.2% in 2020 according to financial analysis. These gains are driven by cost management, supply chain optimization, and disciplined capital allocation. Additionally, Costco's e-commerce expansion-marked by a 15.6% sales growth in 2025 according to investor results-positions it to compete with digital-first rivals like Amazon.

Looking ahead, analysts anticipate a compound annual revenue growth rate of 7.4% from 2025 to 2028 according to forecasts, supported by international expansion and new store openings. Free cash flow (FCF) is projected to reach $10.7 billion by 2028 and climb to $15.65 billion by 2035 according to financial projections, suggesting that the company can sustain dividends and reinvest in growth. These fundamentals imply that Costco's current valuation, while high, may be justified if earnings growth meets expectations.

Historical Context: Resilience in Past Cycles

Costco's historical performance offers insights into its ability to navigate valuation extremes. During the 2008 crisis, its P/E ratio fell to 19x, but the company's defensive business model allowed it to outperform the broader market. Similarly, in 2020, Costco's P/E rose to 38.49, reflecting its role as a safe haven during the pandemic. The 2025 P/E of 50x, while elevated, is not unprecedented in the context of market cycles. However, the current environment-marked by higher interest rates and tighter credit conditions-introduces new risks that could amplify volatility.

Balancing the Equation

The decision to invest in Costco hinges on reconciling its premium valuation with its long-term growth potential. On one hand, the stock's current P/E of 50x and forward P/E of 49x according to financial data suggest that the market is pricing in aggressive earnings growth. If Costco delivers on its projections-such as a forward P/E decline to 35.55x by 2029 according to strategic analysis-the valuation could normalize, unlocking value for investors. On the other hand, margin pressures, international expansion challenges such as slower growth in China, and digital innovation gaps could temper expectations.

Analysts remain divided, with price targets ranging from $620 to $1,225 per share by 2028 according to market analysis. This dispersion reflects divergent views on Costco's ability to maintain its growth trajectory. For long-term investors, the key is to assess whether the company's membership model, operational discipline, and strategic initiatives can offset near-term risks.

Conclusion

Costco's 23-year worst relative performance against the S&P 500 according to market data presents a paradox: a stock with strong fundamentals and a resilient business model trading at a valuation premium. While the current P/E and P/B ratios suggest overvaluation, the company's membership-driven growth, operational efficiency, and long-term earnings potential provide a counterweight. Investors must weigh the risks of margin compression and macroeconomic headwinds against the rewards of a business that has consistently adapted to changing market conditions. For those with a multi-year horizon and a tolerance for volatility, Costco could represent a strategic buy-but only if the company's execution aligns with its lofty expectations.