Costco Stock Is Doing Great! But Is It a Buy Now?

Costco (NASDAQ: COST) is hitting it out of the park right now despite the difficult retail backdrop. The company's sales and earnings numbers are nothing short of impressive, thanks at least partly to an advantaged business model. But does all of this make the stock a buy right now?

What does Costco do?

Before getting into Costco's financial performance, it is important to understand the business. From a big-picture perspective it is a retailer, but when you dig into the model there's an important nuance. Indeed, Costco is a club store, which means customers pay a membership fee for the privilege of shopping in Costco's stores. This changes the dynamic dramatically.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

Image source: Getty Images.

In the fiscal first quarter of 2025, Costco generated roughly $2.2 billion in operating income. Membership fees generated nearly $1.2 billion in revenue. Membership fees don't have material costs associated with them, so most of that revenue just falls down to operating income. And that means that over half of Costco's operating income is directly attributable to the membership fees it collects.

The most important job Costco has is to keep its members happy since they are, effectively, an annuity-like income stream. With an over 90% renewable rate, the company is clearly doing that job well. But how does Costco achieve this? By offering good products at attractive prices. Those membership fees are helpful here, too, since that revenue allows the company to be aggressive (meaning it works hard to have low prices) when it comes to the prices it charges. Being an industry giant, with an over $460 billion market cap, helps there, as well, since it can be more demanding of its suppliers.

Costco is a differentiated, and attractive, business and it is performing very well right now.

Costco is hitting on all cylinders

The fiscal first quarter is the proof of Costco's model. The top line grew an impressive 7.5% with same store sales up a huge 5.2%. Earnings per share came in at $4.04 per share, up from $3.58 in the same quarter of the previous year. This is a very strong showing, noting that store traffic rose 5.1%. That basically means that Costco's membership fee-paying customers are happily coming back to buy even more from the company's stores.

There is a very good reason to like Costco as a business. There's just one problem for investors. Sometimes, as famed value investor Benjamin Graham liked to highlight, a good company can be a bad investment if you pay too much for it. It looks like Wall Street is well aware of how well Costco is doing today.

COST data by YCharts

There are different ways to look at this issue. Just from the price chart, Costco is within 5% of its all-time highs. That has pushed the dividend yield down toward the low end of its historical range. Both of these facts hint at an expensive stock.

Using more traditional valuation metrics, Costco's price-to-sales and price-to-earnings ratios are both well above their five-year averages. That alone hints at a steep price, but there's another little wrinkle. When you look at historical graphs and the P/S and P/E ratios, you see that both are also near the highest levels in the company's history.

COST PS Ratio data by YCharts

Basically, when you examine Costco's valuation you can only come away with one take -- the stock is historically expensive. Yes, it is a good company, but it probably isn't a good stock to buy right now.

Bide your time with Costco

Just because Costco is an expensive stock today doesn't mean it will always be an expensive stock. In fact, the stock has seen drawdowns of more than 40% multiple times in the past. So there's a chance that it could, someday, see a price decline that would make it a buy. But, right now, the best place for this advantaged retailer is probably on your wish list.

Should you invest $1,000 in Costco Wholesale right now?

Before you buy stock in Costco Wholesale, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Costco Wholesale wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $699,020!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

*Stock Advisor returns as of March 3, 2025

Reuben Gregg Brewer 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.