Costco Stock Has Had a Tough Year. Time to Buy?

Costco stock has slipped back after a long stretch of outperformance. As of this writing, shares of Costco Wholesale (NASDAQ: COST) are trading below $900 again, putting the shares in the red for 2025.

The wholesale club remains one of the strongest retailers in the market. Costco's membership model and private-label brands continue to pull in steady traffic and high renewal rates. The problem for investors is not the business -- it's great. It's the valuation.

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Robust growth

Showing the retailer's ability to perform even in an uncertain economy, Costco's fiscal fourth-quarter net sales rose 8% year over year to $84.4 billion, with full-year net sales up 8.1% to $269.9 billion.

This net sales growth was primarily powered by robust comparable sales growth. Total company comparable sales increased 5.7, while e-commerce sales climbed 13.6% in the quarter and 15.6% for the year.

Bottom-line growth outpaced top-line growth. Fourth-quarter earnings per share rose 11% year over year.

Of course, the company's top- and bottom-line growth was also helped by new store openings. Costco opened 10 new warehouses during the quarter, with several of those in international locations.

"Reflecting on fiscal year 2025 overall," explained Costco CEO Ron Vachris in the company's fiscal fourth-quarter earnings call, "our merchandising and operations team did a fantastic job delivering strong financial results while also investing in our employees and improving value and convenience for our members."

Costco's secret sauce

The company's membership model remains the quiet engine powering its results. In the fourth quarter of fiscal 2025, membership fee income grew 14% year over year to about $1.72 billion, outpacing revenue growth. At quarter's end, Costco had 81 million paid household memberships, up 6.3% from a year earlier, and executive members (whose numbers increased 9.3% year over year) accounted for nearly three-quarters of worldwide sales.

To be fair, not every metric moved in the right direction. U.S. and Canada renewal rates dipped to 92.3% in the fourth quarter of fiscal 2025, with worldwide renewal at 89.8%, both slightly lower than in the prior quarter. Management tied the decline to more online signups and a past promotional campaign reaching the renewal stage. But management believes the trade-off in lower renewal rates was worth reaching these members.

Valuation leaves little cushion

While the operations look healthy, the stock price already reflects a lot of that strength. Costco currently has a price-to-earnings ratio of 49. By contrast, the S&P 500's price-to-earnings ratio is about 26, even after a strong year for the index.

Costco stock, of course, deserves to trade a premium valuation. The company pairs steady same-store-sales growth with a membership model that throws off high-margin fee income -- and renewal rates still sit near record levels. But a price-to-earnings ratio near 50 leaves limited margin for error if growth slows or if consumer spending weakens.

And Costco's growth, while healthy, is not explosive. Sure, membership fee income is growing faster, yet this is in part due to a recently implemented membership-fee increase in the United States and Canada, which limits easy levers for similar jumps over the next few years since Costco's membership fee increases are rare -- usually spaced out by more than five years.

The balance sheet does add comfort for existing shareholders. Costco ended fiscal 2025 with cash, cash equivalents, and short-term investments of more than $15 billion against $5.7 billion of long-term debt, leaving the company in a net cash position. That financial strength supports regular dividends, special dividends from time to time, and ongoing warehouse expansion without aggressive borrowing.

But ultimately, investors may still be paying too much. If comparable sales growth were to slow meaningfully from recent mid-single-digit levels or if renewal rates continued to drift lower, the current valuation could take a big hit.

For investors who already own shares, selling solely because the stock trades at a rich price-to-earnings ratio may not make sense. But for investors looking to start or add to a position in Costco shares, it might make sense to wait for a better entry point.

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.