As of this writing, there are nine different companies that have made it into the illustrious trillion-dollar club. The vast majority of these operate within the technology sector. But there’s one dominant retail business that could make the cut one day.
I’m looking at Costco (NASDAQ: COST). Shares of the thriving warehouse club operator have climbed 236% in just the past five years, outperforming the S&P 500. Can this unstoppable retail stock get to a trillion-dollar market cap by 2030? Here’s what investors need to know.
Success factors
Costco didn’t become the world’s third biggest retailer without possessing some very favorable traits. Investors should understand these three characteristics that make the business truly special.
For starters, Costco’s scale creates a very strong and durable competitive advantage. Its huge revenue base, coupled with a more focused product assortment, gives the company incredible negotiating leverage with suppliers. This leads to favorable costs on merchandise, resulting in ongoing low prices for shoppers.
Costco benefits from customer loyalty. It’s not a shock that selling high-quality goods at low prices is a winning combo to attract customers. But Costco runs a successful membership model, which not only provides a recurring, predictable, and high-margin revenue stream, but encourages repeat purchases from shoppers.
The company’s financial performance is steady. In the past decade, the company’s revenue has climbed at a compound annual rate of 8.5%, with diluted earnings per share (EPS) increasing at a yearly pace of 13.5%. The business seems to do well no matter what the broader economy is doing, whether there are recessionary fears or inflationary pressures.
Growth potential
Costco currently has about 900 warehouses, with nearly 70% of them in the U.S. In fiscal 2024, the company added 29 net new locations to its footprint, with plans to open 26 net new locations globally in the current fiscal year. This is the right strategy, as new warehouses often see long lines on the first day of opening. What’s more, it leads to higher sales, more profits, and more memberships.
It’s anyone’s guess what Costco’s ultimate cap is on total store count. It has barely penetrated the massive Chinese market, and it’s still expanding in the U.S.
But at its current size and reach, investors should temper expectations. Costco certainly still has growth potential, but the gains going forward are surely going to come down from the faster rates posted in the past. It takes more incremental revenue to move the needle. There will also be fewer places around the world where it is feasible for Costco to open new warehouses.
Wall Street analysts estimate revenue to rise at a yearly rate of 6.9% over the next three fiscal years, an outlook I find quite reasonable.
Valuation is a concern
In order for Costco to enter the exclusive $1 trillion club in the next six years, its market cap needs to expand by 126%, translating to a compound annual pace of 14.5%. For what it’s worth, this would mark a slowdown from the past six years, a period that saw the market cap increase by 349%.
While it’s not a stretch at all to believe Costco can continue growing revenue and EPS at a healthy clip for the foreseeable future, investors shouldn’t ignore the valuation. As of this writing, shares trade at a price-to-earnings (P/E) ratio of 60. Since Costco completed its initial public offering 39 years ago in December 1985, the stock has never been this expensive.
I believe there’s a high likelihood that the P/E ratio will come down over the next several years, creating a major headwind to achieving adequate investment returns. This supports my argument that Costco will not reach a $1 trillion market cap before the end of the decade.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
