Where Will Costco Wholesale Stock Be in 5 Years?

Maybe it's those famous $1.50 hot dog meals, but Costco Wholesale (NASDAQ: COST) continues to flex its muscles.

The leading membership warehouse retailer reported impressive numbers in its most recent earnings report, highlighting the company's robust customer base at a time when consumers are pulling back at many other stores.

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The stock's long-term performance is legendary. Costco's shares have risen by over 600% in the past decade alone. The company was a favorite of the late Charlie Munger, who, alongside Warren Buffett, helped run Berkshire Hathaway for decades.

I crunched the numbers to see whether the stock's future is as bright as its past. Here is where I think Costco Wholesale stock will be in five years.

Image source: The Motley Fool

Costco's special business model continues to deliver growth

Costco Wholesale is a warehouse store, which sells items in bulk and other products not typically found at discount retailers, such as Walmart or Target. And people need a paid membership to shop there.

The beauty of Costco's business model is that it sells its merchandise at razor-thin margins, while generating most of its profits from membership fees. Its secret sauce, though, is the brand power it has built.

Costco has made its stores destinations for consumers, who sometimes go out of their way to visit their closest one for perks like discounted gas or the company's famous $1.50 hot dog meal. The branding works so well that it doesn't spend any money on marketing, an incredible fact, considering how competitive the retail space is.

Chatter has picked up this year about a slowing economy, and some companies have sounded the alarm on consumer spending. Yet Costco's most recent quarter featured an impressive 8% increase in net sales (a 5.8% increase in comparable-store traffic) from the same period a year ago. Paid memberships, Costco's core earnings engine, rose by 6.8%.

However, the stock has run ahead of the underlying fundamentals

Costco Wholesale is genuinely a world-class business, so it makes total sense that the stock has performed so well over time.

But when a stock price rises faster than the company's earnings grow, the valuation goes up.

The stock traded at a price-to-earnings (P/E) ratio between 25 and 35 for several years leading up to the COVID-19 pandemic. But over the past five years, that has steadily risen to nearly 60 times earnings today.

COST PE Ratio data by YCharts.

The stock's P/E ratio is now higher than it was immediately following the pandemic, when stimulus checks temporarily boosted consumer spending and growth expectations. Currently, analysts expect Costco to grow its earnings by 9% to 10% annually over the long term.

Here is where I think Costco Wholesale stock will be in five years

Paying such a high valuation for just 9% to 10% annualized growth is probably not sustainable. It sets expectations so high that the stock could abruptly crumble at the first sign of trouble, or the stock could plateau until Costco's earnings grow and catch up to the valuation.

I looked five years ahead to see what that might look like.

Costco Wholesale has one quarter left in its fiscal 2025. Analysts believe its full-year earnings will come in around $18 per share. Suppose the company grows earnings at a 10% annualized rate from there. That's higher than what analysts currently estimate, but I'm trying to be generous to make a point.

Doing the math, Costco's growth in earnings per share would look like:

• Fiscal year 2026: $19.80
• Fiscal year 2027: $21.78
• Fiscal year 2028: $23.96
• Fiscal year 2029: $26.35
• Fiscal year 2030: $28.99

By then, the stock price will depend on what the market values Costco Wholesale at.

The stock routinely traded at a P/E of around 30 before the pandemic. If you apply that to Costco's hypothetical 2030 earnings, you'd get a share price of $870. Unfortunately, Costco Wholesale traded at $1,040 per share at the time of this writing.

That's why I think the stock will be lower in five years. As great as the company is, there isn't nearly enough growth to justify such a high valuation, meaning there are potentially years of business growth already reflected in the share price today.

Unfortunately, even the best companies can be lousy stocks if you overpay, so consider avoiding Costco until the price drops quite a bit.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.