Could Investing $10,000 in Costco Wholesale Make You Richer?

Costco Wholesale (NASDAQ: COST) has grown into one of the world's largest retailers, and its business success has translated to life-changing returns for shareholders. The stock has returned more than 6,330% over its lifetime, turning a $10,000 investment into more than $642,000.

Shoppers flock to its stores for its vast selection of bulk-quantity goods and quirky customer favorites, like its famous $1.50 hot dog meal, which hasn't increased in price since it launched over 40 years ago.

But can Costco stock continue making investors wealthy? Here is what investors can expect.

Image source: The Motley Fool.

Why the business can continue making shareholders richer

Costco's business is wonderfully simple. The company sells a wide variety of bulk-quantity goods, food, beverages, and odds and ends at low prices. Shoppers often treat their store visits like field trips, and the brand is so beloved that Costco doesn't need to spend any money on advertising.

The catch? You need to purchase a membership to shop at Costco, and that's how the company makes most of its profits. High-margin membership fees allow Costco to act as a price leader, selling its goods at razor-thin markups that reinforce its reputation as a place where people shop for deals.

The beauty of Costco's model is that it gatekeeps its stores. Costco is popular with high earners, who are willing to spend upfront on bulk quantities in the name of per-unit savings and to pay for the privilege of shopping there. High earners also account for an outsized share of total retail spending, making them a lucrative customer demographic.

Costco currently has 82.1 million paid memberships and continues to grow steadily. Paid memberships grew by 4.8% year over year in the most recent quarter. Management can also raise membership prices, though that's less common. Costco raised its membership fees for the first time in seven years in September 2024.

Wall Street analysts estimate that the company will grow earnings by an average of 10% annually over the next three to five years. Often, the companies with slow but consistent success over decades have the most lucrative stocks, and there's no reason to believe that Costco won't continue making investors richer with continued excellence as a top retail company.

However, a lofty valuation puts prospective buyers in a bind

World-class companies frequently command premium stock valuations. It would seem that Costco's stock has gotten a bit carried away in recent years. Shares trade at 52 times Costco's trailing-12-month earnings, about 33% above its decade average.

Data by YCharts.

Frankly, it's tough to justify paying over 50 times earnings for 10% earnings growth, even for a business as well-run as Costco. Therefore, consider staying on the sidelines until shares at least approach their historical valuation, whether via business growth or via a pullback from the stock's current price.

Investors who overpay for Costco stock are far less likely to enjoy returns commensurate with the company's sterling reputation.

Justin Pope 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.