Since the onset of the coronavirus pandemic, Costco (COST -1.78%) has experienced a surge in sales and new customers. Along with bargain prices and great product availability, the warehouse club's wide aisles apparently made customers feel safer while shopping in person. Twenty-one months into the pandemic now and the sales boom isn't slowing, even as economies reopen and consumers have more options on where to spend money.
With the sales boom came a lot of interest in Costco stock -- it's up by almost 50% year to date in 2021. New investors are wondering if the excellent performance might already be priced into Costco's stock, dampening its prospects for further stock price appreciation anytime soon.
Image source: Getty Images.
Let's take a closer look at Costco's business, as well as several valuation metrics, and see if we can determine if the stock is too expensive right now.
Costco is always working to improve customer value
Over the last 10 years, Costco grew revenue at a compounded annual rate of 8.2%. Compare that to 17.5% revenue growth in 2021, and you can see the magnitude of the surge in demand since the pandemic onset.
Since its inception, Costco has shown that consumers appreciate the opportunity to shop there so much they are willing to pay a membership fee for the privilege. In its fiscal 2022 first quarter (ended Nov. 21), Costco had 62.5 million paying memberships. That was 800,000 more than it had in the previous quarter. Another demonstration of Costco's customer value is that it boasts a 91.6% membership retention rate among its U.S. and Canadian members.
While Costco is known for providing excellent value at its warehouses, management is taking steps to improve the online experience. Folks can increasingly schedule convenient delivery times for big and bulky items. The same goes for returns and return pickups. Finally, Costco is expanding the options available to customers who shop online, including picking up in-store and rolling out e-commerce lockers.
Costco is a unique retailer in that it is constantly working to improve the customer value proposition. That's apparent when you look at Costco's profit margins in the last decade. Despite revenue expanding from $99 billion in 2012 to $195 billion in 2021, Costco's gross profit margin stayed relatively flat, between 12.4% and 13.3%. Ditto with its operating profit margin, which hovered between 2.8% and 3.4%.
Costco's stock looks expensive right now
It's pretty clear from these metrics that Costco is an excellent retailer. Its model of providing consistently great value to customers and working to improve on that value has resulted in a loyal, growing member base. Investors have taken notice and that is reflected in the stock price.
Costco's stock price is up almost 50% year to date, suggesting these positive prospects are already priced into the stock.
Data by YCharts.
That theory is further strengthened when you look at Costco's valuation metrics (see chart above), such as the price-to-sales ratio (1.23), the price-to-earnings ratio (48.42), and the price-to-free cash flow ratio (43.01). Each metric is hovering near the highest level in the company's recent history.
Costco is a great business, but that is reflected in its price. To more directly answer the question posed in the headline, yes, Costco's stock does look expensive -- perhaps too expensive for 2022. Investors might want to be prudent and wait for a pullback before buying Costco stock.
