Is Costco Stock a Buy, Sell, or Hold in 2025?

Key Takeaways:

• Costco’s stock surged 50% in 2024, potentially reaching $1,000 per share by early 2025.
• Comparable-store sales increased by 7%, with e-commerce growth roughly double that rate.
• Competition with Walmart is intensifying, especially among higher-income shoppers.
• Costco’s gross profit margin is around 13%, lower than Walmart’s and Target’s.
• High valuation raises concerns about potential risks if performance falters.

A Stellar Performance in 2024

Costco Wholesale’s shares didn’t close above the coveted $1,000 mark by late 2024, but they came remarkably close. The stock rose 50% through mid-December, effectively doubling the rally of the S&P 500. This impressive ascent puts the $1,000 per-share milestone within reach, perhaps as early as 2025.

The warehouse retailer captivated Wall Street over the past year by demonstrating its ability to attract more customers to both its physical stores and online platform. This growth occurred despite rising membership prices and a backdrop of increasingly cautious consumer spending patterns.

Growth Momentum Continues

Entering 2025, Costco is riding a wave of solid momentum. The company reported that comparable-store sales increased by 7% in the fiscal first-quarter period that ended in late November. Notably, growth in its e-commerce segment was roughly double that rate. These figures reflect Costco’s robust operational performance and highlight its expanding digital footprint.

Such results have outpaced those of rivals like Target and Walmart. However, competition is heating up. Walmart’s booming e-commerce business is attracting more higher-income shoppers into its ecosystem, potentially challenging Costco’s stronghold on this key demographic.

Intensifying Competition

Walmart’s recent success in drawing wealthier customers poses a significant threat to Costco. The intensifying rivalry centers on attracting and retaining higher-income shoppers, a demographic crucial to Costco’s business model. As Walmart enhances its online offerings and customer experience, the battle for market share is expected to escalate.

Despite these challenges, Costco has a strong track record of outgrowing competitors across various economic conditions—from recessions to periods of booming consumer spending. Investors may still anticipate modest market-share gains in 2025, albeit amid fiercer competition.

Profitability and Dividend Policies

While Costco’s growth story is compelling, its profitability metrics tell a different tale. The company’s commitment to low prices keeps its gross profit margin at around 13% of sales. In contrast, Walmart achieves double that figure, and even Target, despite struggles in 2024, has boosted profitability toward 30% of sales.

Investors shouldn’t expect Costco to narrow this gap soon. Management has expressed a clear intention to invest excess cash into maintaining low prices rather than enhancing profit margins. Additionally, Costco’s dividend policy offers modest quarterly cash returns compared to its peers. Although the company periodically issues large “special dividends,” investors seeking a generous and predictable income stream might find Walmart a more attractive option.

Valuation at All-Time Highs

Costco’s stellar performance has elevated its valuation to historic levels. Shares are priced at an all-time high of 1.7 times sales and 58 times earnings—a premium that leaves ample room for contraction if market conditions shift or if Costco’s operational results falter in the coming year.

For investors whose portfolios have become heavily weighted with Costco stock due to its rally, it may be prudent to consider rebalancing to avoid overexposure to a single asset. The high valuation could amplify potential losses should the market turn or if the company faces unexpected challenges.

The Case for Holding On

Despite the high valuation and competitive pressures, Costco has earned its premium over peers. The company’s long-standing track record of market-share gains and its retail-as-a-service model, which generates stable membership fees, contribute to less variable earnings compared to other retailers. This stability was a key factor in Costco’s strong performance throughout the pandemic and its immediate aftermath.

Looking ahead, it’s likely that investors will continue to benefit from holding Costco stock in their portfolios in 2025 and beyond. The company’s strategic focus on customer loyalty and value delivery positions it well for sustained growth, even in a challenging economic environment.

Conclusion

Costco’s near miss of the $1,000 per-share milestone underscores a year of significant achievement. Strong sales growth and expansion in e-commerce signal that the company is adeptly navigating market trends. However, intensifying competition and profitability concerns introduce caution into the investment equation.

As with any investment, weighing the potential risks against the anticipated rewards is crucial. Costco’s proven resilience and customer-centric approach make a compelling case for investors to consider retaining or even increasing their stake, keeping an eye on how the company addresses emerging challenges in the year ahead.