Costco's Valuation Puzzle: Why Even Strong Results Can't Justify the Premium Price Tag

The Numbers Don’t Lie, But They Tell a Complicated Story

Costco has demonstrated it remains a retail powerhouse, yet the stock has had a demanding 2025 so far, trading below $900 and sitting in negative territory for the year. The wholesale giant’s most recent quarterly performance reveals why the business model remains compelling—and simultaneously why investors should think carefully about entry points. With shares commanding a price-to-earnings ratio of 49, compared to the S&P 500’s 26, Costco is asking investors to pay a steep price for membership and convenience.

Execution Remains Flawless

The operational story deserves credit. Costco’s fiscal fourth-quarter net sales climbed 8% year-over-year to $84.4 billion, with full-year sales reaching $269.9 billion—a gain of 8.1%. What stands out is the earnings expansion: fourth-quarter earnings per share rose 11%, outpacing the top-line growth rate. E-commerce accelerated too, climbing 13.6% in the quarter and 15.6% for the full year, while comparable sales increased a solid 5.7% in the quarter.

The company expanded its footprint with 10 new warehouse openings in the quarter, including several international locations, demonstrating management’s confidence in the business model’s global appeal.

Membership: The Unsung Profit Engine

The real story beneath Costco’s numbers lies in its membership machine. Fourth-quarter membership fee income grew 14% year-over-year to approximately $1.72 billion—outpacing overall sales growth and highlighting the business model’s leverage. The company now counts 81 million paid household memberships, up 6.3% annually, with executive members growing 9.3% and representing nearly three-quarters of worldwide sales.

However, there’s a speed bump. U.S. and Canada renewal rates dipped to 92.3% in the latest quarter, while worldwide renewal rates fell to 89.8%. Management attributed this to online signup timing and prior promotional campaigns cycling through renewal phases, suggesting the issue is temporary rather than structural.

The Valuation Ceiling Problem

Here lies the fundamental tension. A price-to-earnings ratio of 49 assumes Costco will deliver growth and execution that few companies sustain indefinitely. While Costco’s combination of steady comparable sales growth, high-margin membership fees, and robust renewal metrics justifies a premium to the broader market, the current premium appears to leave minimal room for missteps.

Consider the dynamics: Costco just implemented a membership fee increase in the United States and Canada. The company historically spaces such increases more than five years apart. This means membership fee growth will decelerate meaningfully over the next several years as the boost from the recent hike normalizes—no easy levers remain for explosive membership revenue acceleration.

Comparable sales growth, while healthy, operates in the mid-single-digit range—respectable for retail but not explosive. The math becomes challenging: if comparable sales decelerate even modestly, or if renewal rates continue eroding, a 49x multiple could compress sharply.

A Strong Balance Sheet, But Not an Escape Route

Costco ended the fiscal year with over $15 billion in cash and equivalents against $5.7 billion in long-term debt, providing substantial financial flexibility for dividends, special distributions, and warehouse expansion. This fortress balance sheet reassures current shareholders but doesn’t solve the valuation calculus for new investors.

The Verdict: Quality at an Uncomfortable Price

Costco remains one of retail’s finest operators, executing a membership model that generates predictable cash flows and loyal customers. For existing shareholders, the quality business justifies holding despite the premium valuation. For prospective investors, however, the current risk-reward setup tilts unfavorably. The stock has had a challenging 2025, but this pullback may still not provide adequate margin of safety at a 49x earnings multiple. Waiting for a more compelling entry point—whether from slower growth, valuation compression, or both—would likely serve patient capital well.