Costco stock price and the case of extreme overvaluation

By:
on May 28, 2024
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  • Costco Wholesale will publish its financial results on Thursday this week.
  • The company’s revenue is expected to come in at $54 billion, a small increase from $53.6 billion.
  • There are signs that Costco is highly overvalued compared to its peers.

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Costco (NASDAQ: COST) stock price has been one of the best performers in the past few decades. It has jumped by over 22% this year and by more than 71% in the past 12 months. Additional data shows that the company’s shares have soared by over 14,000% since going public.

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Stretched valuation

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Costco Wholesale’s stock has done well over the years, helped by the company’s growing sales and market share. Its annual revenue has soared from $152 billion in 2019 to more than $248 billion in the trailing twelve months. 

The company has also become highly profitable. Its net profit jumped from over $3.7 billion in 2019 to over $6.7 billion in the TTM. Analysts expect that its revenue and profitability growth will continue in the coming years. The fears that its business will be disrupted by Walmart and Amazon have not worked out.

Costco will publish its financial results on Thursday. Analysts expect that its revenue will be $54 billion, up slightly from the $53.6 billion it made in the same year in 2023. For the year, analysts expect that its revenue will rise by 4.9% to over $254 billion.

Therefore, there are concerns that the company is severely overvalued since it is not growing as fast and that its multiples are a bit stretched. Costco Wholesale’s forward revenue and EBITDA growth stand at 6.16% and 9.5% while Walmart’s are 4.86% and 8.1%.

These numbers mean that the two companies have no big divergence in revenue and profitability growth. However, their valuation metrics have a significantly big spread. Costco has a forward PE ratio of 50.2 while Walmart has a multiple of 28. 

Other retailers like Target, Kroger, and Dollar General have a smaller forward PE multiple than Costco. The faster-growing S&P 500 index has a forward PE ratio of 20.

At the same time, Costco’s margins are also not all that special to warrant this valuation. It has a net income margin of 2.73% while Walmart, Target, and Dollar General have profit margins of 2.8%, 3.8%, and 8%, respectively. 

Therefore, it is hard to explain why Costco deserves these hefty valuation metrics. A likely reason is that it has one of the best balance sheets in the retail sector with over $10.3 billion in cash and just $9.4 billion in total debt. Walmart has $9.4 billion in cash and over $64 billion in debt. 

Costco stock price forecast

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COST chart by TradingView

The daily chart shows that the COST share price has been in a strong bull run over the years. It recently crossed the crucial resistance point at $785.4, its highest swing on March 7th. It invalidated the double-top pattern, which is a popular bearish sign.

Costco’s stock has constantly remained above the 50-day and 100-day moving averages. However, the Relative Strength Index (RSI) has formed a bearish divergence pattern. Therefore, I suspect that the stock will drop to the key support at $785.4. This is known as a break and retest pattern, which is a popular sign of continuation.

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