Costco Earnings Look Great. But Is the Stock Overvalued?

Key Points

• Membership-fee income and comps helped maintain momentum in the period.

• Margins and operating income moved higher despite cost pressures.

• At 52 times earnings, the stock may be priced for perfection.

• 10 stocks we like better than Costco Wholesale ›

Last Thursday, Costco Wholesale (NASDAQ: COST) reported impressive fiscal fourth-quarter results, with both revenue and earnings per share exceeding expectations. The membership warehouse retailer continues to lean on a high-renewal, fee-driven model that makes its results unusually predictable, even when consumers are cautious. Shares were roughly flat in after-hours trading as investors weighed a premium valuation against yet another strong quarter.

Costco is a membership-based retailer that operates 914 warehouses globally, plus e-commerce in major markets. Its scale, limited-SKU model, and private label penetration help it offer low prices -- a formula that typically shows up in steady traffic and reliable fee income. The latest quarter kept that story intact, setting up the key question for investors: Does the current stock price still make sense?

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Double-digit earnings growth

The numbers were encouraging across the board. Fourth-quarter net sales rose 8% to $84.4 billion, with total revenue (including membership fees) up to $86.2 billion. Comparable sales increased 5.7% (6.4% adjusted for gas and FX), with e-commerce up 13.5% on an adjusted basis. That top-line performance flowed through: Operating income climbed to $3.34 billion from $3.04 billion, and earnings per share increased to $5.87 from $5.29. It is also worth noting that last year's quarter included a $0.14 per-share tax benefit, which makes this year's profit growth a bit stronger than the headline spread suggests. Adjusting for the year-ago benefit, adjusted earnings per share rose 14% year over year.

Meanwhile, membership fee income continued rising nicely. Fee income reached $1.72 billion in the quarter and $5.32 billion for the year, up from $1.5 billion and $4.8 billion in the year-ago periods, respectively.

Finally, the company keeps expanding its store count. Costco ended the year with 914 warehouses worldwide, up from 891 a year ago. Combining its strong adjusted comps and double-digit e-commerce growth with its growing warehouse count, it's easy to see why investors have high expectations for the company.

The valuation leaves little room for error

But a great quarter doesn't solve the questions about Costco stock's valuation. Trailing-12-month earnings per share for fiscal 2025 came in at $18.21. This gives the stock a valuation of about 52 times earnings. That multiple arguably bakes in years of high-single-digit sales growth and solid profit margin expansion -- outcomes that are achievable, but hardly guaranteed given wage investments, recently extended hours for executive members, and potential tariff or macroeconomic pressure.

To be fair, Costco continues to execute well, and the stability of fee income provides some cushion when merchandise margins fluctuate. Additionally, the company also exited the year with more cash on an already pristine balance sheet -- thanks to continued operating cash flow growth, which supports ongoing warehouse openings, a regular dividend, and even occasional special dividends. Even so, investors should remember what the stock's huge premium implies: Small disappointments on comps, renewal rates, or costs could compress the price-to-earnings ratio quickly, potentially leading to only modest returns, even if the business keeps performing well.

Where does that leave the stock? For investors already holding shares, today's report reinforces the long-term case. Costco's model remains resilient, and the combination of steady comps, strong fee income, and disciplined growth continues to shine. New money, however, is a tougher call. At about 52 times earnings, the risk-reward looks stretched. A better move may be to keep Costco on a shortlist, and look for a better entry point -- whether through a broader market pullback or a period when the stock price stalls and fundamentals catch up.

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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.