Could Costco Help You Become a Millionaire?

Costco (NASDAQ: COST) has without a doubt been a winning investment over the years. In the past three decades, it has put up a monster total return that exceeds 16,000% (as of Nov. 14). This is a dominant retailer whose success has directly benefited shareholders. Early investors might have even generated life-changing wealth owning the business.

Shares currently trade 14% below their peak, which was established in February. Maybe now is a good time to add Costco to your portfolio. If you buy this retail stock today, could it help you become a millionaire?

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Costco remains the gold standard in the competitive retail sector

It's difficult to find durable success in the retail industry, which is arguably one of the most competitive markets around. There are low barriers to entry. Customers have zero switching costs, and their tastes are always changing. And margins are generally razor-thin. However, Costco stands out from the crowd.

Because this is a high-quality business, it should certainly be on every long-term investor's watch list. Costco possesses a wide economic moat that comes from its cost advantage. During fiscal 2025 (ended Aug. 31), the company raked in $270 billion in net sales, highlighting its massive scale. Additionally, Costco operates with limited inventory, selling 4,000 stock-keeping units on average in its warehouses, significantly below other supermarkets. This gives the business tremendous buying power and negotiating leverage over suppliers, helping keep costs in check.

Customers are the direct beneficiary of this favorable setup. They see low prices when shopping. This should be enough to keep them loyal.

But Costco has figured out another way to drive repeat purchase behavior. Shoppers pay annual dues to visit the company's warehouses. This brings in a predictable and high-margin source of revenue, to the tune of $1.7 billion in Q4.

There's also proven pricing power here. In September of last year, Costco increased annual fees for both of its membership tiers. This was the first hike since 2017. Despite its asking its shoppers to pay more, membership households and membership income have steadily climbed. During the fourth quarter, Costco registered a worldwide membership renewal rate of nearly 90%.

Investors must think about valuation and earnings growth

One key factor that can drive shareholder returns is earnings per share (EPS) growth. In the past decade, Costco's diluted EPS has climbed at a compound annual growth rate of 13%, showcasing the underlying success of the business. By opening new warehouses both in the U.S. and internationally, and because of its growing membership base, Costco is able to increase sales.

Wall Street analysts see EPS rising at an annualized clip of 10.6% between fiscal 2025 and fiscal 2028. That's a healthy outlook. Costco is a fantastic business that should continue to grow its earnings power over time, albeit slower than before.

But the valuation points to this not being an attractive buying opportunity today. Investors must be comfortable paying a price-to-earnings ratio of 50.6 in order to buy the stock right now. That presents no margin of safety.

So it should come as no surprise that this stock probably won't be a millionaire maker from here.

It's also important to avoid putting all your eggs in one basket in an attempt to get rich. It's rare to become a millionaire owning one stock. The best move is to build a diversified portfolio that can do well over the long term.

Neil Patel has 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.