Wide-moat Costco posted impressive fiscal 2024 third-quarter results, and we plan to slightly raise our $500 fair value estimate as we remain confident in its financial outlook. Still, we think shares are significantly overvalued.
Costco maintains a proven formula for successfully translating its operations across borders and faces minimal direct competition abroad, implying a long runway of growth prospects.
Bears
As Costco reaches a point of maturity in its US and Canadian markets, the firm’s cost leverage may show signs of deterioration.
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Costco operates a membership-based, no-frills retail model, predicated on offering a select product assortment in bulk quantities at bargain prices. The firm avoids maintaining costly product displays by keeping inventory on pallets and limits distribution expenses by storing its inventory at point of sale in the warehouse. Given Costco’s frugal cost structure, the firm is able to price its merchandise below competing retailers, driving high sales volume per warehouse and allowing the retailer to generate strong profits on thin margins. Costco operates over 600 warehouses in the United States and boasts over 60% market share in the domestic warehouse club industry. Internationally, Costco operates another 270 warehouses, primarily in markets such as Canada, Mexico, Japan, and the UK.