Investors looking for growth stocks have to come to grips with valuation. Buying stock in a fast-growing business is fine, but paying too much for even a great company can turn it into a bad investment. Keep that in mind when you look at growth stocks Visa (V +0.13%) and Costco (COST +2.19%) today. Here's what you need to consider before you buy.
What do these growth stocks do?
Costco is a global retailer that operates club stores. To shop at Costco, a customer must pay a membership fee. Those fees cost the company very little, create an annuity-like income stream, and give the company the flexibility to accept lower margins on its products. Low product prices help keep its customers happy, leading to membership renewals. It's a virtuous cycle that has driven strong growth for Costco over time, as it also works to expand its geographic footprint.
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Visa is a payment processor. It collects a small fee for securely connecting sellers with buyers who use cards displaying the Visa logo. The company handled 257.5 billion transactions in fiscal 2025. Visa has long benefited from the shift from cash to card payment, a process that continues as e-commerce becomes increasingly important.
Attractive businesses, but at what price?
Both Costco and Visa are likely to continue growing for years. Either business would make a fine addition to a growth-oriented portfolio. However, that ignores the valuation of the stocks. You can't simply pay any price and hope for the best. Valuation is a big problem when you consider Costco today.
NASDAQ: COST
Key Data Points
Costco's price-to-sales (P/S) ratio is 1.5 right now compared to a five-year average of roughly 1.2. Its price-to-earnings ratio is 51 compared to a longer-term average of 44. And its price-to-book (P/B) value ratio is 14.1 versus a five-year average of 12.4. Costco's dividend yield is 0.5%, near its lowest level over the past decade. It appears very clear that Costco is being afforded a premium price right now, historically speaking.
Visa's P/S ratio is 18 versus a five-year average of 20. Its P/E ratio is 32 compared to a longer-term average of 33. And its P/B ratio is 17 compared to a five-year average of 14. Visa's dividend yield is 0.8%, around the middle of the range over the past decade. Valuation is more an art than a science. On the whole, Visa appears more reasonably priced, historically speaking, than Costco.
NYSE: V
Key Data Points
As a reference point, the S&P 500 (^GSPC +1.21%) has an average P/E ratio of around 28 and an average P/B ratio of about 5.2. The S&P 500 index's yield is roughly 1.1%. Based on that comparison, neither Costco nor Visa would likely qualify as a value stock. However, if you are looking for a growth stock, you will likely need to pay a premium over the "average." On that score, Visa looks more attractively priced than Mastercard right now, perhaps even falling into the "growth at a reasonable price" category.
Heed Benjamin Graham's advice
Benjamin Graham, who helped to train Warren Buffett, was a value investor who worked during the Great Depression. He watched as valuations rose to unsustainable extremes and realized that paying too high a price for a good business can turn it into a bad investment. What you want to do is pay a fair (or cheap) price for a good business. When you compare growth stocks Costco and Visa, it is pretty clear that Costco is being afforded the higher premium and should probably be kept on an investor's wish list for now.
