Costco Wholesale (COST +1.23%) has a habit of turning "boring" retail into impressive compounding. But the stock didn't deliver in 2025. After a rare weak stretch for the stock, investors are looking at 2026 and asking whether the membership-based wholesale retailer's shares will finally resume their upward march.
After all, it's not like the underlying business is showing any weakness. Costco's comparable sales continue to grow at high rates, and the company has exceptional momentum internationally -- in markets where it still has a lot of room to expand.
In short, there's a lot to like.
The problem is price -- not the price of Costco's goods, but the price of its stock. Are shares really worth a valuation of 47 times earnings?
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Strong business growth
If you're looking for evidence that Costco's business is continuing to grow rapidly, you'll find it easily.
In its first quarter of fiscal 2026, Costco's total sales rose 8.2% year over year to about $66 billion. Comparable sales, or sales at warehouses open for more than one year, rose 6.4%, and digitally enabled comparable sales (comparable sales tied to digital ordering behavior) rose 20.5%.
Importantly, Costco said that its comparable sales growth was driven by both increased traffic and ticket sizes.
Another part of Costco's business worth calling out is its "other international" business, which includes all of its markets except its mature U.S. and Canada markets. Comparable sales from these geographies have been rising faster than the U.S. Adjusted to exclude the impacts of changes in gas prices and foreign exchange, Costco's "other international" comparable sales rose 6.8% in fiscal Q1. This compares to adjusted comparable sales of 5.9% in the U.S. for the same period.
This strong quarter is a continuation of the robust growth the company has been steadily delivering for investors. In fiscal 2025, total sales rose 8.1% year over year to about $270 billion.
Even stronger growth in membership fees
Costco's real advantage is not just cheap bulk goods. It is its membership flywheel.
In its fiscal first quarter, membership fee income rose 14% year over year to about $1.33 billion. That is faster than its sales growth -- an important consideration for investors to keep in mind, as membership fees are a high-quality revenue stream, both in terms of margin profile and their recurring nature.
Of course, the strong membership fee growth benefited from a membership price hike last September. Specifically, management said in Costco's fiscal first-quarter earnings call that its "U.S. and Canada membership fee increase accounted for a little less than half of membership income growth."
The rest of Costco's membership fee income growth in fiscal Q1, of course, came from growing its membership base. Paid executive memberships rose 9.1% year over year to 39.7 million, and total paid members rose 5.2% to 81.4 million.
NASDAQ: COST
Key Data Points
But what about valuation?
The problem is that Costco's price-to-earnings ratio of 47 and its forward price-to-earnings of 42 may simply be too high a price to pay -- even for a business as high-quality as Costco. A valuation this high introduces a level of valuation risk, where shares could simply revert to a lower valuation, even as the company executes well. If a rerating occurs over a prolonged period, it could simply lead to underperformance. But it could also happen suddenly, resulting in a drop in the share price.
To illustrate just how high Costco's valuation is, note that Costco currently has a price-to-earnings multiple slightly higher than Nvidia's, well beyond Amazon's, and even ahead of Apple's.
Costco certainly deserves a high valuation multiple due to its steady and predictable growth, as well as its apparent competitive advantage in the form of scale and low prices. But the valuation leaves little room for error. Not only is there valuation risk, but competition could intensify -- especially from e-commerce players like Amazon. Additionally, there's some formidable brick-and-mortar competition; Walmart has its own successful warehouse club (Sam's Club), and grocers Kroger and BJ's Wholesale could make inroads on Costco's turf over time.
So, could Costco rebound in 2026? Of course. But it could also underperform again. The better question is whether shares look overvalued, fairly valued, or undervalued. I'd argue they are somewhere between fairly valued and overvalued. For this reason, I'll personally stay on the sidelines at this price.
