Note: Costco FY’24 concluded on September 1, 2024.
Costco’s (NASDAQ: COST) shares have experienced significant growth, increasing by 40% in 2024 (calendar year) and tacking on another 7% so far in 2025, easily surpassing the S&P 500’s 2% increase. What’s fueling this momentum? Robust performance supported by its membership model. In fiscal Q3 2025 (which ended on May 11), Costco generated $63.2 billion in revenue and $2.5 billion in operating profit. Of that amount, $1.2 billion was derived from membership fees alone—accounting for nearly half of the operating profit, and primarily recurring. With inflation putting pressure on household budgets, Costco’s value-oriented model is resonating well with consumers. In May 2025, sales experienced a year-over-year increase of 7%—more than twice the 3% growth across the broader U.S. retail industry.
At first glance, it seems like a retail paradise.
However, here’s the drawback: Costco is trading at 55 times earnings and 59 times free cash flow, resulting in a meager 1.7% cash flow yield. For perspective, Amazon (NASDAQ: AMZN), which enjoys faster top-line growth and exposure to high-margin sectors like cloud and advertising, trades at a lower multiple. While Costco may claim scale, strategic position, and market affection, it comes at a hefty cost. Refer to Buy or Sell Costco Stock?
Costco’s valuation assumes perfection, and even a minor deceleration could lead to turbulence. To put it in perspective, this stock is not immune to volatility. Shares plummeted nearly 49% during the 2008 financial crisis, 20% during the Covid-19 crisis in early 2020, and 32% during the inflation-driven pullback of 2022. Investors should remain aware of that history, even as the current fundamentals appear strong.
What’s Causing the Premium?
Strength of the Business Model
Costco’s high valuation is based on its consistently strong performance. In fiscal Q3 2025, the company achieved earnings per share of $4.28, reflecting a 13% year-over-year increase, on $63.21 billion in revenue, an 8% rise. Comparable-store sales increased by 8% year-over-year, while e-commerce grew by nearly 15%, excluding fuel and currency impacts. Membership renewal rates remained exceptional, at 92.7% in the U.S. and Canada, and 90.2% globally, with total household memberships rising by 6.6%.
In the latest quarter, Costco’s U.S. same-store sales surpassed Walmart’s (NYSE: WMT) 4.5% and significantly outperformed Target’s (NYSE: TGT) 3.8% decline, highlighting the warehouse model’s attractiveness to value-oriented shoppers. The company’s high-margin, recurring membership revenue has shown remarkable resilience during economic hardships, contributing to the stock’s recent surge.
Operational Scale and Supply Chain Flexibility
Operating 905 warehouses worldwide, including 624 in the U.S., Costco leverages its pricing advantage through extremely thin margins and the efficacy of its private-label brand, Kirkland Signature. In Q3, shopping frequency increased by 5.2%, while the average transaction size only rose by 0.4%, showing that foot traffic—not price inflation—is driving the growth.
Costco’s adaptable supply chain has allowed it to manage increasing tariffs by redirecting shipments and altering sourcing strategies. With two-thirds of its merchandise sourced domestically and merely 8% of U.S. sales connected to China, its exposure to trade risks is limited. The company is also localizing Kirkland production and experiencing steady demand for essentials such as groceries and fuel. Its scale enhances pricing power, which is vital for maintaining its premium valuation.
Exceptional Business, Elevated Valuation
Costco continues to be a premier operator, but its high valuation seems detached from its fundamentals. Revenue growth is solid, yet not explosive, lingering in the low teens. Store expansion has slowed—less than 3% for this fiscal year—and some new locations may eat into existing sales, indicating a maturing presence. The current premium assumes that elevated growth will persist. If comparable sales trend towards mid-single digits, investor confidence—and Costco’s valuation multiple—could come under pressure.
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