Costco Wholesale (COST -1.72%) has become a phenomenon. Its differentiated warehouse retail model is incredibly reliable, and Costco consistently enjoys strong growth. Beyond that, it has several growth drivers that make it even more compelling as a stock with massive potential.
However, like anything in life, Costco isn't perfect. If you're considering buying Costco stock today, there's one major risk you need to know about as well.
Why everyone loves Costco
Investors and shoppers alike love Costco. It offers rock-bottom prices on its products, and it's a rare company that boasts low gross margins instead of high ones. Most retailers make money by marking up prices and taking profits. Costco, counterintuitively, tries to provide the lowest possible price, and it makes money instead on something else -- membership fees. So while it seems like a retailer, its business is really in selling memberships.
In the 2025 fiscal first quarter (ended Nov. 24), sales increased 7.5% year over year, and comparable sales were up 5.2%. Renewal rates were 92.8% for the U.S. and Canada and 90.4% worldwide. Membership fee income increased 7.8% year over year, and paid household members were up 7.6%.
Executive members continue to grow in number as well. Executive members pay double the annual fee of a basic membership -- $130 since Costco raised it in September. These members account for 46.8% of paid memberships, but 73.1% of sales.
There's plenty of room to grow, too. Costco plans to open about 26 net new stores in 2025, which is slow but steady growth. There are many new opportunities both in the U.S. and abroad. Even though it already has 140 stores in California alone, which account for nearly a quarter of all U.S. stores, it just opened another one a few weeks ago. It had Costco's highest-grossing opening ever, with $2.9 million in sales on its first day.
Each warehouse is massive and contributes a lot to the whole, which is why Costco can add new stores at a slow pace and still reel in so much in sales. Even though there are only 617 U.S. stores, Costco is the third-largest U.S. retailer by sales.
Between new stores and new members, it doesn't look like Costco is going to slow down any time in the foreseeable future. It also pays a growing dividend, and sometimes a special dividend, which adds even more to the bright picture.
What's the risk?
Costco has been a market-beating stock for decades. It's a recession-resistant stock although it was under pressure in the previous bear market as it managed through inflation.
As a rock-solid business, Costco trades at a premium valuation. The standard valuation metric is usually the trailing 12-month price-to-earnings (P/E) ratio, and Costco stock is trading at 57 times trailing 12-month earnings, or near its highest-ever levels. Sometimes one valuation metric looks high, but according to others, the stock might be cheaper than you think. Not here -- according to nearly every commonly used valuation metric, Costco is expensive, both relative to its average and to its peers.
This is the very opposite of a bargain. However, I wouldn't call these levels nosebleed, either. The market has high expectations of Costco, because it's delivered so reliably for such a long time, and because it still has so much more potential. The risk is that at this valuation, the stock could fall as soon as there's any imperfection. There's no room for error.
You can't time the market, and in 10 years, Costco stock should be much higher than it is today. However, new investors might want to wait for a better entry point, or use a dollar-cost averaging strategy to buy Costco stock right now.
