Thanks to a larger store footprint, Costco (COST 1.01%) has grown its revenue and earnings at healthy rates over the years. Unsurprisingly, this has resulted in strong stock returns. Last year, the business saw its shares rise 45%, outpacing the Nasdaq Composite Index.
Can the momentum continue for this top retail stock to increase by 44% (from the price on Jan. 29) and hit $1,000 by the end of 2024? Here are the factors that investors should focus on.
Costco has many wonderful qualities
Costco is a unique retailer because it sells memberships to consumers for the right to shop at one of its 873 warehouses. There are 129.5 million member cardholders who all pay annual fees, which translates to a stable source of high-margin revenue. In fact, in fiscal 2023 (ended Sept. 3), 73% of Costco's net income was accounted for by membership fees.
What's more, having such a massive scale helps Costco take advantage of volume discounts from its suppliers. That's why its stores can sell name-brand products at some of the lowest prices around.
Two more probably overlooked traits make Costco a great enterprise. The low prices are a key part of the company's strategy, but if we take another step downstream, we'll understand how impressive the customer value proposition is.
Besides selling quality merchandise at low prices, Costco creates a fantastic shopping experience. Part of this is the treasure hunt atmosphere that encourages shoppers to visit stores more often. Another factor is how well Costco takes care of its employees, with solid pay and extensive benefits even for part-time workers. Happy employees lead to happy customers.
The other trait Costco benefits from is its ability to defend against technological disruption. The rise of e-commerce has certainly been a terrible development for many brick-and-mortar retailers. From the consumer's perspective, they have far greater choices, increased convenience and accessibility thanks to delivery options, and more favorable pricing. This has resulted in a changing landscape.
Costco has had to deal with the rise of Amazon and its popular Prime membership, which counts a whopping 200 million members across the globe. But even with the tech juggernaut breathing down its neck, Costco has continued to thrive, as its impressive financial performance over the past decade clearly shows. Customers still appreciate a compelling in-person shopping experience.
Valuation is the most important variable
In the last 10 years, Costco shares have soared more than sixfold. Because of this tremendous performance, I believe the cat's out of the bag. It's no secret that this is an outstanding company.
This means that the valuation isn't really attractive right now. Shares trade at a price-to-earnings (P/E) ratio of 47.3, representing a sizable 41% premium to the trailing 10-year average. There's a lot of optimism already reflected. The shares are expensive today after their strong performance in recent years. Consequently, I just don't think a $1,000 price target is likely this year.
Since we're looking at a time frame of roughly 11 months, what matters most to the stock is how market sentiment changes. Because Costco is already starting from a high valuation, this only raises downside risk should the business miss revenue or earnings estimates, or if investors sour on the stock for whatever reason. This limits the upside.
Regardless of what happens throughout the rest of 2024, though, investors should consider things with a long-term mental framework. If you're still OK with the current valuation, you might want to buy and hold shares for the long haul.
