Costco Wholesale (COST 0.87%) has been a growth beast over the years. People never appear to tire of the company's treasure-hunt experience. Even during the early stages of the pandemic and amid restrictions, the company generated strong growth. But lately, things have cooled and its numbers aren't as impressive as they have been in the past.
However, even if that trend continues, there could be a massive opportunity for Costco to expand its top line more consistently down the road. That opportunity lies in China.
Costco to open multiple stores in China this year
On the company's earnings call earlier this month, management stated that Costco would be opening three additional stores in China before the end of the year -- at the time of the call, it had just two in the country. Despite being one of the top economies in the world, China isn't a country that has been big on Costco's radar; it has more warehouses in Spain (4) and Australia (14).
In 2019, the company opened its first location in Shanghai, China -- and in just a single day, 139,000 people signed up for memberships. A couple of years later, in 2021, it opened its second location in Suzhou.
This year, many Americans are worried about a possible recession and a slowdown in the economy. In China, however, the government expects its gross domestic product to grow at more than 5%. That's up from the 3% growth it reported in 2022, amid COVID lockdowns.
For Costco, China is also a way to diversify outside of North America, where most of its 848 warehouses are located, and into a fast-growing Chinese market. Costco already has a presence in Asia with 14 warehouses in Taiwan and 18 in South Korea, but mainland China has been largely untapped until recently.
Costco needs a growth catalyst
Costco may need to find a new market to focus on after generating such strong results over the past few years, to ensure that its top line continues to rise. In its most recent results, for the period ending Feb. 12, the company's comparable sales were up 5.2% year over year. At the same time last year, the comparable growth rate was 14.4%.
For a long stretch, the company was reporting double-digit growth every month. This streak has since ended; February's comparable sales growth was just 3.5%. A growth catalyst may be necessary, especially now that the U.S. economy is facing a possible recession. Plus, Costco isn't a cheap stock. It trades at 35 times earnings -- that's close to double the S&P 500 average of 18.
For it to help justify and maintain that kind of a premium, the business will need to generate more growth.
Should you buy Costco's stock today?
The resiliency of Costco's business makes this a good stock for long-term investors to hang onto. Although the stock is down 10.5% over the past 12 months (slightly worse than the S&P 500's decline of 8%), and it could go lower if the economy struggles, the business is likely to recover and remain a good buy in the long run.
With many markets that it can dive deeper into, including China, Costco could be just scratching the surface in terms of its potential. Even though its valuation may not be cheap, if you're in it for the long haul, this can be one of the best stocks to have in your portfolio.
