Costco Wholesale (COST 1.01%), a thriving business that has flown under the radar this year due to the intense focus on tech and artificial intelligence, just reported its fiscal 2024 first quarter (ended Nov. 26) financial results. And it seems like the market came away impressed.
Shares have crushed the S&P 500 in 2023, up 44%. This continues a long history of outsized returns for investors. But we have our sights set on the future.
Can this top retail stock reach $1,000 per share by the end of 2024? Let's see if this hypothetical 52% gain (from the price on Dec. 15) is a real possibility in the next 12 months.
Costco's momentum continues
In the most recent fiscal quarter, Costco was able to increase net sales by 6.1% on a year-over-year basis to $56.7 billion. Diluted earnings per share jumped 16.6% compared to Q1 2023. These headline figures beat Wall Street expectations.
CFO Richard Galanti mentioned on the Q1 2024 earnings call that "fresh foods were relatively strong" in the quarter, and that "non-food showed improvement." This demonstrates the broad-based appeal Costco has for its customer base.
It's also very encouraging that foot traffic positively surprised executives to the upside. This is a sign that shoppers are turning to Costco as a top destination during a busy holiday season.
The company ended the quarter with 72 million membership households, up 7.6% from last year. These fees brought in just under $1.1 billion in revenue.
These were all strong results, but I think investors were most pleased with the management team announcing a special $15 dividend. Costco is known for approving hefty one-time payouts like this on an occasional basis. The last one was in December 2020 for $10 a share.
Expectations might be too high
There's absolutely no question that this is one of the best businesses around. Costco focuses on taking care of customers with low prices, great service, and a wonderful shopping experience. The company's huge scale makes it hard for other retailers to compete. And by operating a membership-based model, the business generates a high-margin and sticky recurring revenue stream.
The share's monumental historical performance proves this point. Only a business that has strong fundamentals can reward investors like Costco has.
However, as we look out for 12 months, I believe it's unrealistic for the stock to hit $1,000 by the end of 2024. There are two reasons I feel confident about this perspective.
The first one is due to Costco's already massive scale. This is the world's third largest retailer, with 871 warehouses and fiscal 2023 revenue of $238 billion. To be fair, more locations are being opened, and there is sizable opportunity in China. But I believe revenue and earnings growth going forward will be less stellar than what was registered in the past.
The other factor deals with the current valuation. As of this writing, shares trade at a price-to-earnings (P/E) ratio of 46.5. That's significantly higher than what it was at the start of this year. And it represents a meaningful premium to the stock's trailing one-, three-, five-, and 10-year average P/E multiples. Maybe investors view this business as a safe haven during what has been an uncertain economic backdrop.
Costco's steep valuation is the key reason why I don't own this stock right now. The vast majority of the stock's impressive run in 2023 is attributed to a 35% expansion in the P/E ratio.
Nonetheless, I can see why some investors who prioritize quality, reliability, and predictability over the current valuation might still be inclined to own the stock. If this sounds like you, just don't expect a $1,000 price target to be achieved next year. And make sure you plan to buy and hold for many years.
