Motley Fool - Tue May 21, 8:47AM CDT
You probably wouldn't believe that a company that has nothing to do with technological disruption or game-changing innovation has crushed the Nasdaq Composite Index. But that's exactly what Costco(NASDAQ: COST) has done. Its shares have soared 220% just in the past five years.
Can this top retail enterprise become a trillion-dollar stock by 2030? Continue reading to see if Costco can make it into this exclusive club that currently only has seven businesses.
Costco is a great business
Costco is a favorite among people looking for high-quality merchandise at cheap prices. That success with customers helps explain why Costco is a fantastic business. Its scale, as demonstrated by fiscal 2023 net sales of $238 billion, allows the company to obtain favorable pricing on the merchandise it buys from suppliers. This leads to lower prices, with more and more value accruing to shoppers.
On their own, low prices should be enough to keep customers coming back. But Costco's successful memberships help drive loyalty and repeat purchases. The worldwide membership renewal rate was 90.5% last quarter.
At first glance, investors might grimace at the extremely low margins Costco registers. But this is by design. The goal isn't to generate outsized profits on the sale of merchandise, which is typically marked up by just 11%.
The primary objective is to grow the membership base. In the last 12 months, 5.3 million more households became Costco members, resulting in an 8.2% year-over-year gain in membership fee income. This revenue source represents the bulk of the company's operating income.
Costco's dominant competitive position has resulted in wonderful financial results over the long term. Between fiscal 2013 and fiscal 2023, net sales increased 131%, with no yearly decline being reported. This is impressive, particularly considering that recent years have included the pandemic, supply chain issues, inflationary pressures, and high interest rates.
The company's consistency and stability are remarkable. This has led to steadily rising net income. Executives use excess profits to help pay one-time special dividends, boosting shareholder returns.
Investors are enthusiastic
As of this writing, Costco carries a market cap of $353 billion. This makes it the world's 26th most valuable company.
If the business was able to get to a $1 trillion valuation by 2030, it implies the market cap would increase at a yearly pace of 19% over the next six years. For comparison's sake, shares have climbed at a compound annual rate of 26% in the past six years.
To be clear, I don't think it's likely that Costco will reach this milestone, not by the end of the decade at least. In my opinion, the stock won't rise at close to the same pace it has historically.
One reason I feel this way is because I expect the company's growth going forward to slow down from the historical pace. Costco's still opening new warehouse locations and raising its same-store sales, but this is a massive retailer that already has a sprawling presence.
There are currently 876 stores in 14 countries across the globe. In the past decade, Costco has opened about 25 net new locations per year, so that percentage gain is shrinking over time, with less of an incremental effect.
That brings us to the valuation. The stock is incredibly expensive today, trading at a price-to-earnings ratio of 52. That multiple hasn't been this high since before the turn of the century.
So, not only are Costco's revenue and earnings likely going to rise at a more muted pace over the long term, but investors are pricing the stock as if the growth is going to accelerate. That doesn't bode well for investors hoping for a trillion-dollar outcome by the decade's end.
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Neil Patel and his clients have 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.
