1 Trillion Reasons to Buy Costco?

Costco (NASDAQ:COST) has seen enormous success with its membership-driven wholesale approach to retail shopping.

Listed as the third-largest retailer in the world behind only Walmart and Amazon, Costco is an increasingly popular option among cost-conscious shoppers looking to stretch their household budgets by buying in bulk at low prices.

Famously, the company was also a favorite of late Berkshire Hathaway vice chairman Charlie Munger, who amassed a stake of 187,000 shares in the company before his death.

Costco’s performance over recent years has been nothing short of exceptional, causing the value of the company to skyrocket. With eight companies now having made it to $1 trillion valuations, it’s only natural to wonder if and when Costco could join that exclusive club.

Will Costco make it to $1 trillion, and how long could it take the company to get there if it can?

Key Points

• Costco’s revenue and earnings growth, fueled by store expansion and new services, highlight significant future opportunities.
• Costco, currently valued at $393 billion, could reach $1 trillion by the early 2030s with sustained 9.3% annual growth.
• High valuation multiples could hinder gains if growth slows, but analysts remain bullish on Costco’s strong fundamentals.

How High Is Costco’s Current Market Cap?

At the time of this writing, Costco’s market capitalization was $393.0 billion. In other words, the company’s value would have to increase by just over 2.5 times for it to join the $1 trillion club. For Costco, though, this isn’t a particularly unusual feat.

Ten years ago, shares of the company traded at a bit over $100 per share. Today, that number has climbed to over $870 per share.

Though investors who buy today almost certainly won’t see returns this strong in the coming 10-year period, Costco’s excellent performance has allowed it to handily outperform the market over extended periods of time.

Does Costco Still Have Growth Tailwinds Behind It?

Needless to say, Costco will have to continue delivering strong results for the stock to more than double again. Fortunately, there are still very strong growth trends at work when it comes to the retail giant.

To begin with, the company continues to open new stores that drive additional sales. In the company’s fiscal Q2 of this year, Costco operated 875 stores. By the time of the Q3 earnings report, that number had risen to 878. Q4’s earnings results, released just weeks ago, saw this trend continue for a total of 891.

Though far from a massive leap, this shows that Costco is still expanding geographically to capitalize on its well-proven business model in new markets.

The company currently operates in Canada, Mexico, Japan, the UK, South Korea, Australia, China and other international markets. In most cases, though, the number of stores in these markets is relatively small.

China, in particular, stands out with just seven stores in a massive consumer market. As such, Costco still appears to have a great deal of growth runway in markets where it’s already established but still has room to expand steadily.

Costco also continues to deliver strong organic revenue and earnings growth. For its full fiscal year of 2024, Costco’s revenues rose 5.0 percent to a total of $249.6 billion. This was despite the fact that FY2023 was 53 weeks long compared to FY2024’s standard 52.

Net earnings per share, meanwhile, rose from $14.16 in 2023 to $16.56 in 2024. Much of this improvement was driven by rising comparable store sales, which increased by 5.3% across the entire company during the fiscal year.

The company also continues to see robust success in selling wares beyond the bulk groceries and other everyday essentials it has become known for.

Costco Auto, for example, reportedly sells about half a million vehicles each year. Services available to members now include everything from travel packages to insurance.

The company is even jumping on the anti-obesity drug bandwagon by offering members subscription-based access to weight loss programs that include GLP-1 medications provided by Sesame Health.

What About Valuation?

One factor that could work against Costco as it marches toward the $1 trillion mark is its already high valuation.

Shares of the company trade at 49.2x projected earnings, 41.2x cash flow and 16.4x book value. By all of these metrics, Costco is trading at premium multiples that will demand high forward growth rates. The company’s price-to-sales ratio, though, is more modest at 1.5x.

Though there’s little doubt that Costco deserves its premium pricing based on its performance, the stock’s growth multiples could contract whenever that growth eventually begins to slow. If and when it occurs, it could slow down share price appreciation.

For the moment, however, there doesn’t appear to be any sign of a value contraction on the horizon. Indeed, analysts project that COST shares will rise another 8.7% to a median target price of $950 over the coming 12 months.

Will Costco Join The Magnificent 7?

With its ongoing growth, there seems to be a very high probability that Costco will join the Magnificent 7 long-term and become a trillion dollar company but in the short-term it’s unlikely.

Though general trends support Costco gradually advancing toward this threshold in the long run, the fact remains that the company’s market cap still has to more than double before it approaches a 12-figure valuation.

If Costco kept pace with average stock market returns, one might expect the $1 trillion mark to be reached sometime in the early 2030s. On average, the American stock market doubles about every seven years. This would put Costco at around $800 billion in about 2031, with the $1 trillion level being reached before the middle of the decade.

This timeline also seems to fit roughly with Costco’s projected earnings growth rate. Analysts expect earnings to grow at a compounded rate of about 9.3% for the coming 3-5 years. Assuming shares rise at a similar rate, Costco would likely more or less track historical stock market returns.

There is, however, also an argument for a more accelerated timeline. In a best-case scenario where Costco continues delivering strong sales growth, expands its gross margins and reduces its operating expenses, the company could be pushing $1 trillion by as early as 2030.

While the timeline for Costco becoming a $1 trillion business is somewhat uncertain and dependent on future developments, there is little doubt that the company still has very real potential as an investment.

Costco’s business model and management have both proven themselves time and time again to investors, and steady growth seems to favor the company in the long run. Even with high pricing multiples, Costco could still be a good buy today for investors looking for long-term compounders to buy and hold.