This Market-Dominant Shares Remain an Excellent Investment Opportunity
It's challenging to find a more consistent performer in the stock market than Costco Wholesale (COST, down 1.09%). Despite not delivering the most staggering returns, it has consistently climbed, avoiding the usual volatility associated with stocks. In 2022 alone, it has increased by 42%, and despite reaching levels that make its valuation seem exorbitant, it shows no signs of slowing down. Let me explain why this stock should be a part of your investment portfolio.
Costco Increased Its Membership Fee
The durability and longevity of Costco's business model stem from its unique membership system. Unlike most retailers, Costco operates differently, with various components working together to form an unmatchable system. While competitors like BJ's and Walmart's Sam's Club exist, Costco is the largest with the most stores and the highest membership base.
The key component is the low prices, and everything else revolves around this. Costco is one of the few companies that openly acknowledges its low gross margins instead of aiming to increase them. It keeps its prices low to just cover the cost of goods and related expenses, resulting in simple, unadorned warehouse-like stores with products still on pallets.
witch is a unique selling point.
So, how does Costco generate a profit? Through the membership fees it charges, which were recently increased to $65 annually for a basic membership and $130 for an executive membership. Numerous articles and blog posts demonstrate the value of the membership fee for most customers, provided they shop frequently at Costco. This generates loyalty and high customer traffic for Costco.
The management waited to increase the fee past its usual period as consumers were already under pressure. As inflation eases, it plans to use the additional revenue to enhance the value proposition for its customers by investing in its stores.
Membership Continues to Rise
Although an extra $5 in fee may not deter most members, it's yet to be seen if the increase has impacted membership figures. Costco's most recent quarterly update is for the 2024 fiscal fourth quarter (ended Sept. 1), and membership increased by 7.3% year over year. Renewal rates were 92.9% in the U.S. and Canada and 90.5% globally. Executive memberships increased by 9.6%, accounting for 46.5% of the total, and 73.5% of sales.
Management emphasized that membership has been inclined towards younger age groups since the pandemic, with half of the new signups in the fourth quarter being under 40. This is a promising long-term growth driver as this age group ages and continues to shop at Costco.
Costco continues to expand with new stores, opening 30 in fiscal 2024 and planning 29 for fiscal 2025. It's also making significant strides internationally and has numerous new stores in the pipeline.
How High Can Costco Go?
Historically, Costco stock has traded at a premium to its competitors, but it has surpassed its previous valuation limits over the past few months, currently trading at a P/E ratio of 56, a significant premium to its five-year average of 41.
Investors should generally avoid buying a stock at a high valuation relative to industry peers or average. However, investors continue to invest in Costco due to its consistent growth and unique business model. Although there's limited room for error at this valuation, Costco's track record and consistent growth have kept investors interested, regardless of the premium price tag. New investors may want to wait for a better entry point, but it may not get much better than this. Costco stock may be worth a premium price, given its impressive performance.
You can't predict market trends, so if you have a long-term investment horizon and can visualize where Costco stock could be in a few years, you can invest even at the current price.
The increased membership fees are used by Costco to enhance its stores and provide better value to customers, demonstrating the company's commitment to investing in its growth. Despite its current high P/E ratio, Costco's consistent performance and unique business model have kept investors interested, making it an attractive option for those with a long-term investment horizon.
