With all the geopolitical uncertainty, Costco Wholesale Corporation (ticker: COST) is seen as a safe harbor in a storm. In preview, we recommend caution.
Bulls will say that COST shares rose after the company reported quarterly earnings above expectations. Indeed, in its most recent earnings report, Costco posted $4.58 per share in earnings. This compares with analyst estimates of roughly $4.51. In Wall Street speak, Costco “beat the number,” because the result came in above what analysts expected. COST shares now trade near $1,000 a share.
Financial media coverage often reduces earnings announcements to a simple scorecard. Companies either “beat the number” or “miss the number.”
“Beating the number” is obviously considered good, while “missing the number” is treated as bad. It is a form of intellectual shorthand that often substitutes for deeper analysis.
The “number” deserves explanation. The analysts’ estimate is simply the average forecast produced by Wall Street analysts — a collection of educated guesses — frequently influenced by the company’s own guidance. When a company reports earnings above that average estimate, the result is described as a “beat.” In short, it makes for a good TV headline.
But this “beat or miss” framing tells investors very little about a company’s valuation or investment prospects.
Costco is a remarkable business. Few companies in retail have demonstrated such consistent execution. The membership model creates recurring revenue, customer loyalty is extraordinary, and scale advantages allow Costco to operate on razor-thin margins while still generating substantial profits. It is not surprising that the late Charlie Munger was one of the company’s greatest admirers. One might go so far as to say the company has a cult following — of which the author is a card-carrying member.
We share Munger’s admiration for Costco and we count ourselves among the company’s legions of fans. But a great company and a great stock are not the same thing.
Many investors own Costco stock because they love the stores. They shop there frequently. They admire the culture. They admire management. They love a Costco deal! We call these investors — affinity shareholders.
For these shareholders, valuation is not the primary reference point. Their experience with the brand becomes their analysis. When the store experience is consistently positive, it becomes easy to assume the stock must also be a good investment.
This approach can be dangerous. When investors fall in love with a company, they often neglect to ask what they are paying for it.
In the case of Costco, its shares are no bargain.
Analysts following Costco currently expect roughly $20 per share in 2026 earnings. With approximately 443 million shares outstanding and a stock price near $1,000 per share, the company carries a market value of roughly $443 billion (443 million shares × $1,000 per share price).
If Costco earns roughly $20 per share, that translates to approximately $8.9 billion in annual profits for the whole company (443 million shares × $20 per share earnings).
Earning $8.9 billion on equity valued at $443 billion market value is hardly a bargain. In fact, that works out to nearly 50 times earnings. Every time a shareholder buys Costco at $1,000 per share, they are affirming this valuation.
Put another way, investors paying today’s price for COST shares are paying roughly $50 for every $1 Costco is expected to earn next year.
That math is difficult to ignore.
That valuation implies an earnings yield of about 2%.
Absent growth, the business itself is generating only about a 2% return on the price investors are paying today. Of course, Costco is growing, but that expectation is clearly baked into an already aggressive price.
The investment case (and associated current price) relies on exceptional future earnings growth. Many years of steady expansion must happen to justify the current price.
The entire valuation equation therefore rests on growth. Today’s high price can only be justified if profits rise rapidly from current levels — and for investors to earn attractive returns from here, that growth trajectory would need to be even steeper than the one already embedded in the stock.
Today’s Costco investor is effectively accepting a yield similar to what a risk-free savings account currently pays, while assuming far greater uncertainty. We suggest waiting for some bad news to provide a better entry point.
Costco is an excellent retailer, but even its admirers would not describe it as a hyper-growth business. Yet the stock trades at valuation multiples typically reserved for companies experiencing extremely rapid expansion.
At Costco’s current market value/price, there is little (if any) room for disappointment.
At nearly 50 times earnings, many years of excellent performance are already embedded in the price. This is what “priced for perfection” means.
The distinction matters. A wonderful company can still produce mediocre — or even terrible — investment returns if the purchase price already reflects extremely optimistic assumptions.
Even Charlie Munger, one of Costco’s greatest admirers, famously said he would never sell the stock — a statement that reflects the extraordinary quality of the business. But that remark came from someone who bought Costco decades ago at prices that bear little resemblance to today’s valuation. Owning a great business purchased cheaply can be a lifetime decision. Buying that same business at nearly 50× earnings is a very different one.
Costco may appear safe, but its valuation rests on substantial future growth. If that growth fails to materialize as expected, the resulting “miss” could be very painful for shareholders.
Devotion to Independent Thought
Disclosure: Devotion Capital management and clients do NOT own shares of Costco Wholesale Corporation (ticker: COST).
