Costco Is Already a Retail Giant. Can It Become a Trillion-Dollar Company?

Over the past few years, several companies crossed the $1 trillion market capitalization milestone. Most got there by riding transformative technologies such as smartphones, cloud computing, or artificial intelligence.

A warehouse retailer might seem like an unlikely addition to that list.

Yet Costco Wholesale (NASDAQ: COST) has quietly become one of the world's most valuable retailers. Investors have rewarded the company for decades of disciplined execution, industry-leading membership renewal rates, and a business model that keeps customers coming back.

So, could Costco eventually become a trillion-dollar company? The answer isn't as far-fetched as it may first appear.

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A trillion-dollar valuation starts with earnings

The stock market may fluctuate in the short term, but over long periods, earnings ultimately drive market value.

Suppose Costco can grow earnings at around 10% annually over the next decade. Thanks to compounding, profits would more than double during that period. And if Costco's valuation multiples remain the same, it would likely crack $1 trillion in market capitalization.

Let's put the numbers to the test. Costco's existing market capitalization (as of this writing) is $415 billion. If earnings compound at 10% annually for a decade, net profit will increase by 159% over the period. For perspective, net profit grew by 13.5% compounded over the last two years. So far, the numbers add up.

In other words, Costco doesn't need to become the next Nvidia. It simply needs to remain Costco.

The membership flywheel keeps getting stronger

The biggest reason investors have confidence in Costco's future is its membership model.

Membership fees generate billions of dollars in recurring, high-margin revenue every year. Renewal rates consistently exceed 90% in the U.S. and Canada, providing unusually stable cash flow for a retailer.

Those fees allow Costco to operate with extremely low merchandise markups. Low prices attract more shoppers, leading to more memberships, greater purchasing power with suppliers, and even lower prices.

It's a flywheel that has strengthened over decades.

Importantly, the company isn't just adding more members. Existing members are also spending more time. That creates multiple avenues for earnings growth without fundamentally changing the business.

Costco still has room to grow its stores

For a company of Costco's size, its physical footprint remains surprisingly modest.

The company operates fewer than 1,000 warehouses worldwide, leaving significant expansion opportunities both domestically and internationally.

China illustrates that potential. Early warehouse openings attracted enormous customer interest, suggesting Costco's value-focused model can resonate well beyond its traditional markets.

Existing warehouses may also continue to become more productive. Comparable sales growth, rising membership income, and disciplined expansion have historically allowed Costco to increase revenue without sacrificing profitability.

This isn't a story of rapid disruption. It's a story of steady execution.

The biggest obstacle isn't the business

Ironically, the greatest challenge to Costco becoming a trillion-dollar company may not be its operations. It may be its valuation.

Costco already trades at one of the highest earnings multiples in the retail sector. As of this writing, the stock trades at a price-to-earnings (P/E) ratio of 47. Investors are already paying a premium because they expect years of dependable growth.

That leaves less room for disappointment. Slower warehouse expansion, weaker consumer spending, or prolonged pressure on discretionary purchases could weigh on earnings growth. International markets also bring execution risks that don't exist in Costco's more mature North American business.

None of these risks undermines Costco's long-term business model, but they could delay the journey toward a trillion-dollar valuation.

What does it mean for investors?

Can Costco become a trillion-dollar company?

Yes -- but probably not by doing anything dramatically different.

The company doesn't need a breakthrough technology or a new billion-dollar business line. Instead, it needs to keep doing what it has done for decades: Attract new members, retain existing ones, open warehouses in attractive markets, and grow earnings steadily year after year.

If Costco eventually joins the trillion-dollar club, it won't be because it reinvented retail. It'll be because it never stopped improving a business model that has already stood the test of time.

Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Nvidia. The Motley Fool has a disclosure policy.