Is Costco Stock Getting Too Expensive? 2 things investors should consider before buying.

The thought that investors should avoid Costco Wholesale (COST -0.25%) may seem counterintuitive to many. In 2023, an Axios Harris survey ranked Costco second among the nation’s most admired brands. The product range and low prices have ensured consistent sales growth for decades.

Despite these successes, investors are increasingly beginning to question whether Costco stock is still a worthy investment. In 2020, Warren Buffett Berkshire Hathaway closed a long-held stake in Costco, a move that Buffett later said was “probably a mistake.”

His ambivalence about closing his position may leave investors wondering what to do. Keep these two points in mind when weighing decisions about Costco stock.

1. The condition of the company

Costco has historically been one of the most successful retail inventories in the long term. A $1,000 investment in March 1982 would be worth more than $1.5 million today, including dividends.

Additionally, it has developed a loyal following among the members of its wholesale clubs. The company sells high-quality goods at little more than cost plus overhead. This approach has helped push membership renewal rates above 90% globally, and the recent increase in membership fees did not seem to faze customers.

It opened 30 new warehouses in fiscal 2024 (ending September 1), bringing the total to 890. Of those new locations, 23 are in the U.S., with the remainder in Costco’s foreign markets.

Its international success can hardly be overestimated. Other successful retailers including Walmart And Home Depot costly mistakes made in overseas markets due to cultural differences. But Costco’s low-priced merchandise is well received in France or China as well as the U.S., dramatically expanding its growth potential.

2. The financial figures

Unfortunately, these successes will not attract growth investors. In fiscal 2024, revenues of $254 billion rose 5% from year-ago levels. Also, net income rose 17% to nearly $7.4 billion during that period, as cost increases lagged somewhat behind the company’s revenue growth.

That growth rate could make investors wary of its valuation. At one price-earnings ratio (P/E) At a value of 54, the stock is more expensive than at any time since the bull market of the late 1990s. Moreover, the country is so highly valued that its price/earnings ratio has overtaken that of the country Amazonanother historically expensive stock now selling at 45 times earnings.

The earnings multiple is a testament to the demand for high-quality stock and the fact that Costco’s popularity and solid management are known quantities to investors.

Unfortunately for potential investors, its rapid growth prospects are not the reason for its valuation. At one forward price-earnings ratio At a value of 50, the stock price is likely higher than the company’s growth rate, which may indicate that there is more downside than upside in the near term.

Worse, the outlook is bleak if you want to sustain a lower share price. The price-to-earnings ratio hasn’t fallen below 30 since 2019, and the earnings multiple hasn’t reached 15 since the depths of the 2008-2009 financial crisis!

COST PE ratio data Ygraphs.

Even if such dire conditions return, it’s likely that other stocks on investors’ watch lists will have greater upside, further frustrating potential buyers. Therefore, those who decide they must own Costco must resign themselves to paying a premium. And that increases the possibility of underperforming S&P500which makes the stock risky.

Should you buy the shares?

When considering the state of Costco’s stock, you should probably stay on the sidelines.

This is not a conclusion to be drawn lightly. The company is one of the best retailers. It has managed to offer quality products that customers want, at low prices. This has helped build member loyalty, reflected in the renewal rate of over 90%, even as the membership fee was increased with little fanfare.

Unfortunately, investors may have overpriced the strength and growth potential of Costco’s business. While it will likely continue to grow, its price-to-earnings ratio of 54 is near an all-time high, giving the stock more potential downside than upside.

Without a huge pullback, the prospect of market-beating returns is too low at this point to make buying Costco worthwhile.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has positions in Berkshire Hathaway. The Motley Fool holds positions in and recommends Amazon, Berkshire Hathaway, Costco Wholesale, Home Depot, and Walmart. The Motley Fool has one disclosure policy.