Following a 50% surge in value this year, is it plausible for Costco Wholesale's stock to maintain its outstanding surge in 2025?
This year has proved to be a test for numerous retailers, but Costco Wholesale (-0.64% for COST) hasn't succumbed to the challenges. The enterprise has thrived under a variety of economic conditions, consistently putting up impressive quarterly results. As we commenced this week, the stock soared by 50%, outperforming the S&P 500 index and its 27% gains significantly.
However, it's not all smooth sailing for Costco as it charts its course into 2025. The retail stock presently trades at record highs, and investors are now paying a substantial 58 times trailing earnings to acquire a slice of the business. Will Costco's stock continue to build upon its substantial gains in the coming year, or is it primed for a bout of correction?
Costco delivers another exceptional Q1 performance
On December 12, Costco reported its Q1 earnings for fiscal 2025. It was another impressive performance for the company, with Costco increasing its net sales by 7.5% to almost $61 billion for the period ending November 24, due in part to an increase in membership fees. Comparable-store sales growth of 5.2% also indicated that the company remains robust, even as discount retailers and dollar stores falter. It appears that customers are still finding plenty of worth at Costco's warehouses.
Costco surpassed expectations for the quarter, with adjusted earnings per share of $4.04 standing out against the $3.79 projected by Wall Street analysts. Despite another testament to the company's financial health, the stock failed to surge on the news. This could suggest that, perhaps, the stock's valuation may be proving to be somewhat pricey for many investors.
Is Costco's stock on the brink of a slowdown in 2025?
Although Costco's business is still growing and posting solid comparable numbers, it's evident that things are already starting to lose a bit of momentum. The company's growth rate is not as high as it has been in past years.
While Costco's growth rate remains solid under the current economic climate, it drops in comparison when considering the context of its valuation. A year ago, investors were arguably already paying a substantial price tag for the company when Costco's PE ratio was over 40. Now, as it creeps towards 60, it might become increasingly challenging for investors to justify purchasing the stock. Walmart, a competitor, is currently trading at a mere 39 times its trailing profits.
With the decelerating growth trend and its sky-high valuation, Costco is a stock I'd certainly anticipate to sustain a downturn in 2025.
Does Costco still offer promising long-term returns?
Over the next five to ten years, Costco can still deliver attractive returns for investors. The company boasts a wealth of growth opportunities internationally, particularly in China, where it's expanding its presence this year.
However, the catch is that it might take time for its performance to align with its lofty valuation. If you're comfortable with the possibility of 2025 not being a great year for the stock and are willing to buy and hold for several years, then Costco could still be an attractive option to hold on to or consider purchasing. Otherwise, cheaper growth stocks may be a better choice.
In light of Costco's high valuation, some investors might be cautious about its potential future returns, as indicated by the stock's failure to surge upon the release of its impressive Q1 earnings. (money, investing)
Due to its expanding presence in China and strong international growth prospects, Costco still holds promise for long-term investors who are willing to buy and hold for several years. (money, finance)
