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

Big-box retailer Costco Wholesale (COST 0.73%) has dazzled Wall Street with a breathtaking 250% total return over the past five years, easily trouncing the S&P 500. The company’s famously low prices, wide product selection, and popular meal deals (like its $1.50 hotdog) have created a sticky customer base.

It’s a simple formula that has built Costco’s brand and competitive advantages into a juggernaut. I expect it to continue creating business value for shareholders for the foreseeable future.

However, a company’s business and its shares are two different things. The stock’s immense success in recent years raises fair questions about whether investors should continue to expect more of the same. Is Costco Wholesale a buy, sell, or hold heading into next year?

A recent membership fee hike should give Costco a boost

Most people realize that Costco is one of the world’s largest retail companies, with more than $250 billion in annual revenue. But did you know that selling goods isn’t how Costco makes most of its money? The company works on only a 12.6% gross profit margin, using the slimmest markups possible to offer consumers the lowest prices.

Costco’s secret sauce is charging membership fees to anyone who shops at its stores. These high-margin fees account for over 70% of the company’s profits. The company doesn’t raise its fees often, but it did issue an increase earlier this year (approximately 8%) for all new memberships and renewals, starting Sept. 1. The increase will boost membership fees throughout fiscal 2025 (beginning with the upcoming quarter).

Costco’s total membership fee revenue was $4.8 billion in fiscal 2024, so an 8% price increase would translate to approximately $5.2 billion in 2025 without factoring in new memberships. That should all trickle down to Costco’s earnings, which analysts estimate will grow by 10.2% in fiscal 2025 to approximately $17.75 per share.

The stock’s valuation reflects high expectations

As great as Costco is, the company’s earnings haven’t kept up with the stock’s 250% gains over the past five years. As a result, the stock’s valuation has risen by quite a bit:

COST PE Ratio (Forward) data by YCharts

Today, the stock trades at a forward P/E ratio of 54, a hefty premium to the broader market. The S&P 500 currently trades at 23 times its earnings estimates. It’s not necessarily a problem that Costco trades at a higher valuation than the broader market. I agree that Costco is an exceptional business, and its brand power, track record, and durability can influence what investors might pay for a stock.

However, the gap between Costco and the market is so vast that sustaining such a high valuation would likely require rapid growth. Analysts currently estimate Costco will grow earnings by an average of 9.25% annually over the long term. That’s probably not good enough.

Investors can use the PEG ratio to weigh a stock’s valuation against its anticipated growth rate. Costco’s current PEG ratio is a whopping 5.9. I feel comfortable buying stocks with PEG ratios up to about 2.5 if they’re exceptional companies. As you can see, Costco is well beyond that valuation. Translation: The stock probably can’t justify its current price.

Is the stock a buy, sell, or hold?

So, what’s likely to happen?

Nobody can predict short-term stock prices, but this out-of-line valuation will probably work its way back to Earth at some point. The stock might crash and correct quickly. Or the stock price could simply stagnate while Costco’s underlying earnings catch up and remedy the valuation. Either way, it’s hard to see Costco stock continuing to outperform the broader market from its current price.

Does that mean investors should sell their stock? Not necessarily. It ultimately depends on your own investing beliefs and circumstances. Someone sitting on tremendous gains from Costco stock has a logical argument for selling and realizing those returns. Some investors may not believe in selling a high-quality stock for valuation reasons alone, and that’s also fine.

Individuals can decide whether Costco is a stock to sell or hold instead. Either way, Costco’s excessive valuation makes it hard to consider it a buy heading into 2025.