Can Costco Become a Trillion-Dollar Stock by 2030?

As of now, only nine companies have reached the esteemed trillion-dollar market cap. Most of these notable companies are in the technology sector. However, there's one standout retailer that might join their ranks someday, and that is Costco (COST).

Costco's stock has seen impressive growth, climbing 236% in just five years. This performance has outpaced the broader S&P 500 index. But can this strong retail player achieve a trillion-dollar market cap by 2030? Let’s examine the factors that could influence this outcome.

Key Success Factors

Costco hasn't reached the position of the world's third-largest retailer by chance. It has specific qualities that make it a compelling business.

To begin with, Costco's size provides it with a significant competitive edge. With substantial annual revenues and a focused selection of products, Costco has considerable negotiating power with its suppliers. This allows the company to maintain favorable prices on its merchandise, ultimately leading to lower prices for customers.

Moreover, Costco has developed a loyal customer base. Selling high-quality items at lower prices is an effective way to attract shoppers. The membership model that Costco utilizes not only generates a steady, predictable revenue stream but also encourages customers to return for repeated purchases.

Financially, Costco has been stable over the past decade. The company’s revenue has grown at an average annual rate of 8.5%, while diluted earnings per share (EPS) have increased by 13.5% per year. Costco appears to weather economic fluctuations well, regardless of recession fears or rising inflation.

Growth Opportunities

Currently, Costco operates about 900 warehouses, with close to 70% located in the United States. In fiscal 2024, the company added 29 new locations and plans to open 26 more globally in the upcoming fiscal year. This approach has proved effective, as newly opened warehouses frequently generate significant sales right from the start. More locations mean increased sales and more membership sign-ups.

Costco's future expansion potential is significant, particularly as it has only just begun to tap into the vast Chinese market while continuing to grow within the U.S.

However, investors should temper their expectations moving forward. Although Costco still has room to grow, the percentage increases in revenue are likely to decline compared to previous years due to the need for more substantial gains as the company scales up. There will also be less availability for new warehouse locations worldwide.

Analysts project that Costco's revenue will increase at an annual rate of around 6.9% over the next few fiscal years, which seems to be a reasonable expectation.

Valuation Concerns

For Costco to reach the exclusive trillion-dollar club by 2030, its market cap would need to increase by 126%. This equates to an annual growth rate of 14.5%. This growth projection signifies a slowdown from the past six years when Costco's market cap skyrocketed by 349%.

While it is entirely feasible for Costco to continue growing its revenue and EPS, investors must be cautious regarding the company's valuation. Currently, the shares are trading at a price-to-earnings (P/E) ratio of 60, which is the highest since Costco went public in December 1985.

There is a strong possibility that this P/E ratio will decrease over the next few years, presenting a significant challenge for investors looking for attractive returns. This perspective leads to skepticism regarding Costco's ability to reach a $1 trillion market cap by the end of this decade.

There are no positions held by the author or their clients in any of the stocks mentioned in this article.

Costco, Stocks, Growth