2 Reasons to Buy Costco Stock Like There's No Tomorrow
Costco (NASDAQ: COST) is a retailer that every investor should take the time to examine. There are two very important reasons for this, and both are logical reasons to buy the stock. However, there is also one very big reason why investors might want to wait.
Here are two reasons why you might want to buy Costco, and why you also might want to wait until some future tomorrow.
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1. Costco has a very strong business model
The most important thing to remember about Costco is that it is not your typical retailer. It is a club store, which means that customers pay a yearly membership fee for the privilege of shopping at a Costco. Those membership fees are like an annuity that helps to support the company's operating profits and earnings.
To put some numbers on that, in the fiscal third quarter of 2025 (ended May 11), Costco generated revenue of $63.2 billion and had an operating profit of about $2.5 billion. That said, it generated around $1.2 billion in revenue from membership fees, which is nearly half of the operating profit.
That's the norm, noting that there is little cost associated with membership fees. Most of the operating costs are for buying products to sell and staffing the stores that sell those products. So membership fees really do drop right down to the operating income line.
This gives the retailer a huge amount of flexibility when it comes to product pricing. Essentially, the big goal is really to keep customers happy so they continue to pay their membership dues. Those dues, in turn, allow Costco to provide the low prices that keep its customers happy.
With an over 90% renewal rate, Costco is clearly giving its customers what they want. This differentiated business model is probably the biggest reason to buy Costco.
2. Costco is performing very well
Another reason to like Costco right now is the strength of the business today. In Q3, the company's sales grew 8%. Same-store sales were higher by 5.7%. Traffic was up 5.2%. And customers bought 0.4% more on each visit.
That's pretty impressive, given the economic uncertainty today. Compare this to retailers like Target that saw sales fall year over year in its most recent quarterly results.
The negative retail backdrop has also benefited dollar stores, which are serving more and more customers that are trading down to stores with lower price points. But new dollar store customers can trade back up to higher-priced stores quickly and easily, which is a negative compared to the year-long memberships Costco's customers are paying.
Basically, Costco is hitting it out of the park right now. Yes, a lot of that has to do with its low prices, but that just speaks to the strength of its overall business model.
A problem with Costco to consider
So there are two very good reasons to buy Costco like there's no tomorrow. But there's also one very big reason to not buy it, and that's valuation. Wall Street is very well aware of the business strength here and how well the retailer is performing right now. The price-to-sales and price-to-earnings ratios are both above their five-year averages.
The stock price, meanwhile, is near all-time highs. Costco is a growing business, noting that it continues to open new stores. That may be enough to keep aggressive growth investors interested. But if you care about valuation, Costco will be a tough sell.
Many investors will probably want to keep it on their wish list, hoping for a drawdown. The last notable drop, which was more than 25%, came in 2022. So patience can pay with Costco.
Most investors will probably want to wait
At the end of the day, the big reason to buy Costco is that it is a great business. That is as true today as it was yesterday. And it will be the same story tomorrow, as well.
The problem is that even great businesses can be bad investments if you pay too much for them, to paraphrase famed value investor Benjamin Graham. Given Costco's long history of growth, paying too much today may not be the worst thing. But if you wait for a deep drawdown you'll probably be a much happier shareholder.
Should you invest $1,000 in Costco Wholesale right now?
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