Membership-driven wholesale chain Costco (NASDAQ:COST) has had a difficult year, with shares falling almost 6 percent in the last 12 months in spite of ongoing revenue and earnings growth. The stock, famously a favorite of late Berkshire Hathaway Vice Chairman Charlie Munger, seems to have reached a period of stagnation after many years of strong returns. Is Costco a buy on the dip, or do the returns of the last year indicate that the wholesaler is finally leveling off?
Why Is COST Trending Down?
Many of Costco’s problems have been macroeconomic in nature. Rising costs for goods due to tariffs have hammered many retailers, and Costco has largely avoided passing higher costs on to its customers. Given a model that already relies on thin margins, price pressures and an increasingly stretched consumer have both created concerns for investors.
It’s also difficult to ignore the role of a very high valuation in Costco’s selloff. Even with shares down, COST is still trading at 49.4 times its trailing 12-month earnings and 51.0 times operating cash flow. It’s worth noting that the P/S ratio of 1.5 is significantly more reasonable, though it’s still almost three times above the sector average. With such a high valuation, COST shares leave little room for error when it comes to performance.
A general retreat of institutional investors placed much of the direct downward pressure on COST shares. In the last six months, institutional investors have sold almost $94 billion in Costco stock while buying less than $60 billion.
Costco’s Net Sales Growth Still 8%
Even with shares down, it’s difficult to deny Costco’s nearly proverbial qualities as a business. In its recently reported fiscal 2025 results, Costco detailed net sales growth of 8.1 percent to $269.9 billion. Q4 results were similarly strong, with revenue rising 8.0 percent compared to the year-ago quarter. Net income also rose 9.9 percent from FY2024, growing from $7.4 billion to $8.1 billion.
Crucially, Costco’s membership fees rose by a little over 10 percent to a yearly total of $5.3 billion. As the cornerstone of Costco’s profitability, membership is a key metric for the health and success of the business overall. As such, it’s encouraging to note that Costco’s membership revenue growth in fiscal Q4 was even stronger than the year on average, rising more than 14 percent to $1.7 billion. The total number of members grew 6.3 percent to over 81 million by the end of the fiscal year, and membership renewal rates in the US remained above 92 percent.
Costco has also kept its expansion plans up in spite of the somewhat uncertain economic conditions of the last year. As of the end of fiscal 2025, Costco had 914 locations, up from 891 at the end of 2024. In the elapsing year, Costco added 15 locations in the US, as well as increasing its presence in Mexico, Canada, Japan, Korea and Sweden. Geographic expansion could be a key growth driver of Costco in the long run, as the model is proving to be successful outside of North America.
Costco also has a strong balance sheet underlying its business. As of the end of its fiscal year, long-term debt totaled just $5.7 billion, while cash and cash equivalents alone totaled $14.2 billion. Total assets also sharply outweigh total liabilities at $77.1 billion to $47.9 billion.
Turning to profitability, Costco delivers low net margins due to its business model, but the business offers superior returns on invested capital, assets and equity. In the past 12 months, for instance, net margin has come in at under 3 percent. ROIC, however, has totaled 23.2 percent, paired with a 31.2 percent ROE. Costco’s return on its assets, meanwhile, has been 11.0 percent. Crucially, Costco’s ROIC, ROE and ROA are all multiple times the respective sector averages.
Putting all of these factors together, it seems clear that the underlying business of Costco is still very strong, even though the stock performance over the last 12 months doesn’t reflect that fact. With earnings still rising and new stores still opening at a respectable pace, Costco could still have a significant runway left ahead of it.
Is Now the Time to Buy Costco?
While retailers often can’t sustain the kind of valuations that Costco stock now commands, the wholesale membership giant may be a rare exception to the rule. Even in a very difficult business climate, Costco has managed to keep growing and delivering both strong earnings growth and returns on equity. Moreover, the increase in membership revenue shows that consumers are still looking at Costco as a good value proposition, a fact that could help it keep succeeding in what could be a rocky consumer economy for quite some time.
This view on value can also be seen in Costco’s analyst forecasts. The average analyst price target for COST is $1,055.97, almost 17.5 percent higher than the most recent price of $899.01. Though 15 analysts currently rate it as a hold, Costco does maintain a narrow consensus buy rating with 18 analysts recommending the stock as a buy.
It’s also important to consider Costco’s growth potential. In addition to increasing membership from its existing stores, Costco has the potential to drive gradual growth through its geographic expansion. International markets and eCommerce, in particular, could prove valuable as long-term growth drivers. Indeed, even the currently choppy economic conditions could help Costco, as it often thrives at times when consumers are looking for ways to save on everyday goods. Overall, analysts expect earnings per share to keep growing at high single-digit rates through the next several years.
Although there’s no denying that Costco shares carry a high price tag even after this year’s selloff, the stock could be a decent one to buy on the dip for investors looking for long-term buy-and-hold opportunities. COST seems very unlikely to produce sudden returns, but ongoing earnings growth could allow the stock to deliver steady compounding returns over very long periods of time. Costco also has the advantage of being a highly recession-resistant business with an excellent track record, potentially making it attractive in a market that is increasingly appearing wary of highly valued AI and tech stocks.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.