Costco Stock Is Up by Around 30% in the First Half of This Year. Can the Growth Continue in the Second Half of 2024?
Costco Stock Is Up by Around 30% in the First Half of This Year. Can the Growth Continue in the Second Half of 2024?
Costco (NASDAQ: COST) stock seems unstoppable. Even though the business's growth levels have fallen short of past years, the retail stock is up 30% so far this year.
Still, investors have to remember that Costco grows its warehouse count relatively slowly, counting on renewals and increasing sales at razor-thin margins to drive its growth. Will such an approach be enough to grow the stock price by another 30% in the second half of 2024? Let's take a closer look.
The state of Costco
Costco is one of the world's most successful retailers. Its array of high-quality, low-cost goods, most of which are recession-resistant, keeps customers going back to its warehouse clubs.
Despite a nearly 40-year history, the company has plenty of room to grow both domestically and abroad as it targets more midsize cities in the U.S., adds more business centers, and expands to more international markets. Between July and October, it plans to open only 13 new locations globally. It could maintain this slow-but-steady expansion for decades.
Many companies, like Walmart and Home Depot, have pulled back on international expansion plans because their business concepts did not mesh well with other cultures. Costco has not struggled with such challenges, and its international expansion seems poised to continue uninterrupted.
Furthermore, it has one obvious option for increasing revenue -- increasing membership costs. Costco last raised its yearly membership fee in 2017. Membership fees are nearly all profit for the company, and considering the significant inflation since then, it would likely not lose many members by making such a move.
Costco by the numbers
Indeed, a membership increase may look increasingly appealing, given the company's financials. In the first three quarters of fiscal 2024 (ended May 12), total revenue was $175 billion, a 7% increase compared with the same period in fiscal 2023.
While this is still an increase, revenue routinely rose by double-digit percentages in past years, leading to questions of whether sales growth will slow permanently. As mentioned before, the stock has not stopped marching higher and is now near all-time highs. However, that increase gives investors more reason to wonder if the slowing revenue growth will eventually lead to a pullback.
Net income growth appears more robust, with the $5.0 billion in profits for the first nine months of fiscal 2024 rising 21% yearly. Unfortunately, investors have likely incorporated that increase into its valuation.
Consequently, Costco's P/E ratio has also reached 53, its highest since the late 1990s and significantly above its average of around 40. Considering the slowing sales growth, such an earnings multiple appears hard to justify, especially with the stock price continuing to rise.
Can Costco stock rise 30% by the end of 2024?
Given Costco's financials and valuation, investors should not expect the stock price to continue rising at its current pace. As a company, Costco remains a successful and well-run business, and its growth will likely continue. However, revenue growth has slowed from previous years, and with its P/E ratio at a multidecade high, the stock has likely moved ahead of the company's revenue and income growth.
Considering such conditions, Costco stock may be lucky to avoid declines over the next six months, let alone grow 30%.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Home Depot, and Walmart. The Motley Fool has a disclosure policy.