Millions of customers regularly shop at Costco Wholesale (COST 0.65%), drawn by its low prices on a wide range of products. The company operates nearly 900 warehouses open to members only in the U.S., Puerto Rico, Canada, Mexico, Australia, New Zealand, China, Japan, Korea, Taiwan, France, Sweden, the U.K., and even Iceland.
But while the products on Costco's shelves are cheap, its stock isn't. The discount wholesaler's shares trade at over 54 times earnings. Here's what happened the last time Costco stock was this expensive.
Party like it's 1999?
Before we look to the past, let's address a potential objection to the premise that Costco stock is expensive. Is it possible that a stock with a high price-to-earnings ratio could still be attractively valued? Absolutely. That can happen when a company's growth prospects are exceptionally strong.
However, that doesn't appear to be the case with Costco. Its forward earnings multiple of 50.8 is still at a nosebleed level. The stock's price-to-earnings-to-growth (PEG) ratio, which includes growth projections over the next five years, is also a sky-high 5.5, according to financial infrastructure and data provider LSEG.
COST PE Ratio data by YCharts
The reality is Costco stock is more expensive than it's been since April 1999 when its trailing 12-month P/E multiple hit 56.4. What happened after the company's valuation reached that level? It wasn't pretty.
In a matter of months, Costco's share price fell more than 20%. Although it rebounded, the bounce didn't last very long. An even steeper sell-off came in 2000 with the stock plunging more than 40%.
Will history repeat itself?
Any statistician will tell you that a sample size of one is useless in predicting what might happen going forward. And we only have one past occasion when Costco stock was roughly as expensive as it is now.
History buffs would also be quick to point out that Costco reached its highest P/E ratio in 1999 relatively soon before the dot-com bubble burst. Many stocks sported valuations that weren't justified by their business fundamentals. While Costco wasn't a dot-com company then, its stock was caught up in the exuberance and the inevitable aftermath.
A pretty good argument can be made, therefore, that history won't necessarily repeat itself now. On the other hand, there are a few potentially worrisome similarities between 1999 and 2025.
The stock market is again expensive. This time around, enthusiasm about artificial intelligence (AI) is a key driver behind the boom instead of e-commerce. However, some observers believe the market is in an AI bubble reminiscent of the dot-com bubble.
It wasn't only internet stocks that became super expensive in 1999, just as premium valuations aren't limited to AI stocks in 2025. Costco was an exception back then and is again today.
The case for buying Costco stock
Several of my Motley Fool colleagues believe that Costco's shares can continue to rise despite its high valuation. And they make a solid case for buying the stock.
Demitri Kalogeropoulos recently wrote, "Costco has earned its premium over peers by putting together a long streak of market-share wins and constructing a retailing-as-a-service business that generates highly stable membership fees." He's absolutely right about Costco's track record.
Geoffrey Sell noted a few weeks ago, "[Q]uestions surrounding Costco's valuation have been a pretty common theme during the past few years, and the stock has nonetheless continued to perform very well." He's correct, too.
Billy Duberstein concluded in his analysis of Costco, "With its resilient business model and opportunities for both multi-decade growth and profit expansion, the stock isn't as wildly expensive as it might appear." Again, this seems spot-on to me.
I generally agree with all three takes. However, if you think there's a "but" coming, you're right.
Costco is a proven winner, but its share price must ultimately be justified by earnings. If the company's earnings don't grow rapidly enough to warrant a P/E multiple of over 50, its stock is likely to fall to a level that is in line with realistic growth expectations. Costco reported year-over-year earnings growth of 13% in its latest quarter. That's not enough, in my opinion.
Unless Costco's earnings accelerate significantly (which is possible), its share price will likely tumble sooner or later. I don't think the stock will necessarily decline in 2025, though, especially if inflation resurges and pushes more customers to Costco's warehouses. If and when a pullback occurs, though, it could present an excellent buying opportunity for long-term investors -- if history repeats itself.
