Costco Wholesale (COST -0.37%) is one of the most iconic and recognizable retailers in the world. Its massive warehouses are often packed with customers, and its treasure hunt experience inevitably leaves shoppers spending much more than they planned. That’s evident with the company’s strong and impressive growth over the years.
And with so much room to expand, especially in international markets, it’s hard to not like Costco as a long-term investment. But does it have enough upside to potentially turn a $25,000 investment into $1 million over the next 25 years?
Costco’s growth has been robust
What’s impressive about Costco’s business is that it always seems to do well. It generated fantastic numbers during the pandemic and even amid inflation. Whether consumers have been loading up on essentials, discretionary purchases, or trying to save money, there always seems to be plenty of traffic at its stores. The company has been able to consistently grow its top line over the past decade at a fairly high rate — close to double digits.
COST Operating Revenue (Quarterly YoY Growth) data by YCharts
The bulk of its warehouses, however, are still in North America; the United States, Canada, and Mexico account for 767 of its 897 warehouses. The company has been growing its presence in China, but with just seven warehouses there, it’s barely scratching the surface. And it’s the massive long-run opportunities in international markets that can make this a top growth stock to own for not only years, but decades.
Over the past 10 years, the stock has risen an impressive 520%. The one potential problem, however, is that its high valuation could make it difficult for it to replicate those types of returns in the years ahead.
The stock trades at a massive premium
Costco is a beloved business and stock, but to own a piece of it, you have to be prepared to pay a big premium. Today, it’s trading at more than 50 times trailing earnings. That’s expensive, given its single-digit growth rate. The danger when paying such a high multiple for the business is that sky-high expectations are priced in, and if the company doesn’t deliver, there could be a sharp drop in its share price.
COST PE Ratio data by YCharts
Investors have been paying an elevated multiple for the stock since the pandemic began and when its growth rate took off. But now as that growth rate is coming down and staying around more normal levels, I would expect to see the price-to-earnings multiple to also come down, which is why I wouldn’t be terribly optimistic that this can be a millionaire-making stock to hold, even over the long term.
Costco is a good buy, but investors should temper their expectations
While Costco has delivered some great gains for investors in recent years, for it to turn a $25,000 investment into $1 million, it would need to be a 40-bagger; its market cap would need to eventually reach $16.6 trillion. A lot can happen over 25 years, but I wouldn’t expect Costco to turn out to be 40 times more valuable than it is today, as it looks to be overdue for a sizable correction.
This is still a good stock to buy and hold, but investors should be careful not to assume that the stock’s impressive gains in recent years will continue for decades.
David Jagielski has 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.
