Costco stock price has been an excellent performer over the years, which has helped it become one of the biggest companies in the US. It has jumped by 620% in the past decade, bringing its market cap to $413 billion. COST shares will be in focus as it publishes its next earnings.
COST valuation concerns remain
Costco is a giant company that owns large stores in the US, Canada, China, and other countries.
Its growth has accelerated in the past few years even as it faced intense competition from the likes of Walmart, Amazon, and Target.
Data shows that its annual revenue has jumped from over $166 billion to over $254 billion in the past five years. Similarly, its annual profit has almost doubled, moving from $4 billion to $7.3 billion in the same period.
These numbers have led to concerns that Costco is a severely overvalued company. The data show that it has a trailing twelve-month (TTM) price-to-earnings ratio of 55, much higher than the retail median of 17.
In other words, if all factors remained constant if you took the company private, it would take you 55 years to break even. These are significantly high numbers considering that NVIDIA has a forward P/E ratio of 49.
NVIDIA, unlike Costco, is seeing stronger revenue growth. Its recent quarter earnings showed that its revenue almost doubled to over $35 billion.
Costco is also highly valued than a company like Visa, which runs one of the best business models. Visa provides the technology that powers credit and debit cards globally, giving it gross margins of almost 100%. It has a forward P/E ratio of 27, while Mastercard has a multiple of 36.
Costco also has a forward EV to EBITDA multiple of 33, also much higher than the sector median of 11.
Costco, like other dominant companies, deserves a premium valuation, but the current numbers show that it is a severely overvalued company.
Read more: Costco stock is more overvalued than Nvidia: still a buy?
COST earnings ahead
To be clear: the fact that Costco is overvalued is not a prediction that its stock is about to collapse. Historically, highly overvalued companies have done well as long as they produce strong revenue and profit numbers.
The most recent results showed that Costco’s revenue rose by just 1% to $78.2 billion. Its net income rose by 9% to $2.35 billion. This growth happened after the company added more members and adjusted its pricing.
Costco ended the quarter with over 136 million cardholders and 76.2 million paid members. Its renewal rate remained at 90.5%, a strong figure.
The next key catalyst for the Costco stock price will be its earnings, which are expected on Thursday next week. Analysts expect the numbers to show that its revenue rose by 7.3% to $62 billion.
Its annual revenues are expected to jump by 7.4% to $273 billion, followed by $291 billion. Most analysts have a bullish view of Costco, with the most optimistic ones being from Evercore, Telsey, Tigress, and Truist.
Costco stock price analysis
COST chart by TradingView
The weekly chart shows that the COST share price has been in a strong uptrend in the past few years. It remains significantly higher than the 50-week and 100-week Exponential Moving Averages (EMA).
However, some risky patterns are forming. It has formed a rising wedge, which is a popular reversal sign. The MACD and the Relative Strength Index (RSI) have formed a bearish divergence pattern.
Therefore, while the short-term outlook for the stock is bullish, there is a risk that it will have a bearish reversal in the medium term. This retreat could happen when the stock hits the psychological point at $1,000.
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