Costco stock price has retreated in the past few weeks as investors remain concerned about its valuation and the potential supply chain challenges. COST shares retreated from the December high of $1000 to $920, hovering near its lowest level since November 20th. So, is it safe to buy COST shares?
Costco’s business is thriving
Costco, the biggest wholesale company in the world, is doing well despite intensifying competition from Walmart and Amazon.
Its annual sales have jumped from $166 billion in 2020 to over $258 billion in the trailing twelve months. This growth is mostly because of higher sales volume, higher membership fees, and store openings in the US and other countries.
The company has also become a big player in the e-commerce industry, which is now driving its sales. In a report this week, the company said that its holiday e-commerce sales rose by 34.4%, higher than the total company’s 7.4%. Its US sales rose by 9.3%, while Canada and international rose by 4.3% and 1.0%.
The most recent quarterly results showed that Costco’s business continued doing well. Its sales rose from $57 billion in 2023 to $62 billion. Most of these sales were product, while $1.16 billion of them were membership fees. The net income jumped to $1.80 billion.
Analysts expect that Costco’s business will continue to do well in the near term. The upcoming results are expected to show that its sales jumped to $62.65 billion, a 7% annual increase. Chances are that its revenues will be better than expected after the strong holiday figures.
The next annual results are expected to show that the company made $272 billion in revenue, up by 7.13% from a year earlier. It will then make $291 billion in 2026.
Valuation concerns remain
Costco is one of the best American retailers that has endured. It has done this by offering affordable subscriptions that are used by millions of customers in key companies.
The challenge, however, is that Costco is one of the most overvalued companies in the retail industry. While it has huge sales, the company does not make a lot of money per sale, which explains why it has a net income margin of 2.93%. Target has a margin of 4.06%.
As such, from $265 billion in annual revenue, Costco nets about $7 billion. This performance gives it a forward price-to-sales ratio of 50.72, which is higher than some top growing companies like Google, Microsoft, and even NVIDIA.
In other words, if you acquired the whole of Costco today, and all factors remained constant, it would take you 50 years to break even.
To be clear: this is not a call to short Costco since the company has been overvalued for a long time. The stock may be able to remain overvalued as long as it reports strong financial results.
Read more: Costco stock could have more surprises in store despite its YTD rally
Costco stock price analysis
The daily chart shows that the COST share price has remained being under pressure in the past few days. It has crossed the 50-day moving average, and formed a small bearish flag chart pattern.
Costco has also dropped slightly below the ascending trendline that connects the lowest swings since April last year. There are also signs that the company is slowly forming a head and shoulders pattern.
Therefore, the stock may soon experience some weakness and then bounce back. If this happens, it will drop to $867, its lowest level since October 31, which is 6.50% below the current level.
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