Costco's valuation dilemma in 2025: good business, expensive price

The performance is indeed good, but the stock price has already been priced in.

Costco's recent financial report data looks quite healthy: fiscal 2025 total revenue is $269.9 billion, an increase of 8.1% year-over-year; Q4 single-quarter revenue is $84.4 billion, also an 8% growth rate. The e-commerce sector is even stronger, with a 15.6% annual growth. But that's not the issue.

The problem is that these gains have already been fully absorbed by the stock price. COST now has a PE ratio of 49 times, while the S&P 500 averages only 26 times. In other words, you have to pay $49 for every $1 of earnings from Costco, which seems a bit absurd.

Membership fees are real money

Costco's business model is indeed quite strong. Membership fee revenue in Q4 increased by 14% year-on-year to $1.72 billion, and the number of household members grew by 6.3% to 81 million. This segment is a high-margin cash flow engine—no inventory needed, pure profit.

But there is a problem here: the recent increase in membership fees was implemented for the first time in the United States and Canada, which temporarily boosted revenue growth. What's next? Costco usually raises membership fees only once every five years. This means that once this growth momentum is exhausted, it will stabilize over the next few years.

Renewal rate starts to loosen

In Q4, the renewal rate in the North American region was 92.3%, while the global average was 89.8%, both showing a decline compared to the previous period. Management is blaming “online registration and promotional activities,” but this also reflects an increasing price sensitivity. If consumer spending remains weak, the renewal rate may continue to deteriorate.

Abundant Cash but Limited Growth

The balance sheet is indeed impressive: $15 billion in cash + short-term investments against $5.7 billion in long-term debt, providing a sufficient net cash position. This supports dividends, buybacks, and store expansion.

But the core issue is: comparable sales growth remains at a mid-single-digit level (5.7% year-on-year), which is too low for a 49 times PE. Once growth slows or the renewal rate continues to decline, the stock price reaction will be quite painful.

Wait or buy now

For those who already have positions, it may not be wise to sell purely because of a high PE. However, for investors looking to enter the market or increase their holdings, it might be worth waiting for a better entry point. This price already demands Costco to deliver perfect performance, leaving almost no margin for error.