Costco (COST 0.17%) has been one of the prime beneficiaries of the coronavirus pandemic. It was deemed an essential retailer and allowed to stay open while other businesses had to close. As a result, it attracted millions of new customers who are sticking around even as business restrictions are lifted and they have more options.
The stock has responded to the improving performance, hitting record highs. Its meteoric rise now has some investors asking if the valuation is stretched -- or if there is any room for Costco to go higher.
Costco is a longtime winner
Costco has been a longtime winner even though the pandemic boosted the business. The company is entrenched in consumers' minds for providing excellent value. The membership warehouse retailer requires folks to pay dues for the privilege to shop at its stores. At the end of the second quarter, Costco boasted 63.4 million membership households, up 900,000 from the previous quarter.
The increase in customers has fueled compound annual revenue growth of 8.2% in the last decade. Of course, the last few years since the outbreak have trended above its long-run rate. However, it is not likely, for instance, to sustain the revenue growth of 17.5% it reported in its fiscal year 2021, (which ended Aug. 29, 2021). This could be one reason to think that Costco's stock price is likely to hit resistance on the upside.
On the flip side, the company is poised to increase membership fees any month now, boosting operating income meaningfully. Currently, it offers two membership tiers: $60 per year and $120. The latter comes with 2% cash back on all purchases made at Costco stores. Historically, it has increased prices roughly every five years. The last increase came in 2017, giving rise to speculation the subsequent increase could come anytime now. Assuming at least 60 million households renew their memberships, a $10 annual increase could add $720 million to operating income.
To put that figure into context, Costco reported an operating income of $6.7 billion in the fiscal year 2021. The boost could go a long way in making Costco more attractive as an investment.
Image source: Getty Images.
No signs of a slowdown for Costco
Many companies that thrived at the pandemic's onset are starting to show signs of slowing or reversing sales. That's not the case for Costco. Impressively, the membership retailer continues its streak of double-digit sales growth. Additionally, there is reason to believe Costco will keep performing well. Rising inflation is pinching consumer incomes. Costco's reputation for delivering excellent value could attract consumers looking to get more bang for their buck while prices broadly go up in the economy.
COST price-to-free cash flow data by YCharts.
Nevertheless, a lot of the good prospects are arguably priced into Costco's stock. Trading at a price-to-earnings and price-to-free-cash-flow of 48 and 44, respectively, Costco has scarcely been more expensive in the last five years. So to answer the question posed in the headline, Costco stock can certainly go higher from here. However, at these elevated prices, investors would be prudent to wait for a pullback in the price before starting a position.
