Shares of Costco Wholesale (COST 0.50%) have been falling in recent weeks. The retail stock is now down about 11% from its 52-week high of just under $1,097. It's not a huge sell-off by any stretch, but given how strong its gains have been in recent years and how solid a business it has been, it may still make for an enticing option for investors to consider.
On Monday, the stock was trading at around $975. Is it a good buy while it remains below the $1,000 mark?
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Costco's business has been booming, and it still has much more room to grow
Consumers and investors alike love Costco. It's evident in both the company's rising sales and its share price. In five years, the stock has surged around 160%, as the business has been resilient, even though it's not exactly known for being associated with budget-friendly shopping. In fact, people normally break their budgets by spending more than they planned to when going to their local Costco warehouse.
The bargain-hunting business model has, however, worked incredibly well for Costco, enabling the business to grow significantly over the years. In the past three years, its annual revenue has risen from $227 billion to more than $275 billion. And over the trailing 12 months, its top line is now up around $294 billion. Costco has been a growth beast, while focusing mainly on North America; there's still ample room for it to grow internationally. The potential is alluring. The problem with the retail stock, however, is that it isn't cheap.
NASDAQ: COST
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Is Costco worth its hefty premium?
You might expect retail stocks to trade at low earnings multiples for their modest growth, but Costco investors haven't balked at paying much more. Today, the stock is trading at a price-to-earnings multiple of around 50, which in the past may have seemed ludicrous to pay so much for a retail stock. But that's the kind of premium you'd be paying today, even if you bought it below $1,000.
Costco is a great company, and while there's plenty of value within its warehouses, the same can't be said for its stock. The stock has simply surged so much over the years that its valuation has gotten absurd. Even if you love the business, that doesn't make the stock a good buy. Although its share price has been falling in recent weeks, Costco's valuation would have to come down considerably more for it to be an attractive investment.
