There's no doubt that Costco (COST 1.01%) has been a fantastic stock to own historically. A $170,000 investment 10 years ago would be worth $1 million today, translating to a tremendous return of 488% (as of Jan. 15). This crushes the gain of the broader S&P 500 index.
Can this top retail stock be a millionaire maker going forward? Here's what investors need to know about Costco's investment potential as we look ahead.
Customers are the focus
What makes this enterprise truly special is how much the business focuses on its customers and their needs. The company sells high-quality merchandise at some of the lowest prices around, in what many consider a superior shopping experience. The typical markup, as measured by Costco's gross margin of 11%, is far lower than other big-box retailers.
But in order to shop at a Costco location, consumers must pay an annual membership fee. This is a savvy business strategy because memberships provide the company with a high-margin recurring source of revenue. In the most recent quarter (Q1 2024 ended Nov. 26), membership income rose 8.2% year over year. And the current renewal rates of 92.8% in the U.S. and Canada and 90.5% worldwide indicate how much value customers are finding.
Strong financial performance
It's not a surprise that Costco has made for a great investment due to the company's impressive financial performance. Between fiscal 2013 and fiscal 2023, net revenue increased at a compound annual rate of 8.7%. Growth has been remarkably consistent and steady.
And more impressive, Costco's diluted earnings per share (EPS) have risen at an annualized pace of 11.8% during that decade stretch. This demonstrates that strong bottom-line performance is an important factor that drives stock returns.
Despite having 872 warehouses worldwide, management is optimistic about the growth potential. In fiscal 2024, they plan to open 31 net new stores, up from 23 openings in fiscal 2023. The leadership team is also focused on expansion in China, the world's second-biggest economy.
I think it's a safe assumption that if we look out 10 years from now, Costco will be generating much more revenue and profit than it is today. And this is exactly what shareholders want to see.
The potential for outsized returns
Based on the discussion above, it's hard not to like this business. But to figure out whether or not this will make for a millionaire-maker stock going forward, there are a lot of variables to keep in mind. For starters, the initial investment amount matters. And maybe more importantly, the time horizon matters. Someone who is investing with decades in mind, as opposed to a few years, will see a higher chance of becoming a millionaire.
However, I think the most important factor to keep in mind is the current valuation. As of this writing, Costco shares are trading for a price-to-earnings ratio of 46.6. Not only does this represent a more than 100% premium to the S&P 500, but it's also higher than Costco's trailing-10-year average valuation of 33.4. This limits the possibility that the stock could be a huge outperformer in the years ahead.
On one hand, a valid argument can be made that Costco deserves an elevated valuation due to the high quality of the business. On the other hand, it's easy to see how much optimism there is surrounding the company. In other words, shares might be priced to perfection right now, leaving investors with no margin of safety. This isn't an attractive setup.
It's hard to know for sure if Costco can be a millionaire-maker stock in the future. But there's no denying that this is a great company that should be on your radar.
