Flawless business, bulletproof model, but an incomprehensible valuation
Costco might be the closest thing the stock market has to a “perfect” company for every scenario. A company that grows in a recession just as well as it does in a boom. Driven by sticky membership revenue, necessity-driven demand, absurd scale advantages, elite execution, and a business model that works with inflation and deflation alike. This company will still be around in 50 years, probably in 100, maybe even 500. Based on all that, you could say that Costco isn’t just a safe haven — it’s the safe haven. But there’s one thing I haven’t talked about yet. And that’s price.
If you’re wondering why the stock is down almost 20% from its peak, it’s not because anything broke. Far from it actually, the business is flourishing: revenue keeps growing at high single-digit rates, which is exactly what it has done for decades and is expected to keep doing. Free cash flow grows around 10%, margins are stable, cash keeps piling up, and the customer base is as loyal as it gets. There is nothing to complain about operationally.
But then you look at the valuation and it gets more difficult. A forward P/E of 44 for a consumer defensive with single-digit revenue growth is simply wild. Not “expensive but justified” like an Amazon or Visa. It’s just wild. Especially when the S&P 500 trades around a P/E of 28. Yes, Costco is safer than almost anything in the index. But safety alone doesn’t justify paying a multiple that borders on hyper-growth-stock territory. Just for context, Nvidia and Broadcom trade at significantly lower forward P/E ratios and they’re revolutionizing the entire economy right now.
And this is where the comparison gets uncomfortable. I’ve written about Axon before, trading at a P/E north of 100, and yet, in a strange way, Axon’s valuation makes more sense. Explosive growth, an insurmountable moat, expanding TAM, and a category-defining product justify paying for the future. Costco doesn’t have that kind of upside. It has durability, not acceleration. And there’s a place for durability, but that’s at roughly half the valuation Costco is trading at.
So what’s the bull case from here? Multiple expansion from already-stretched levels? Capital rotation into “safety” at any price? If the goal is simply capital preservation, T-bills exist and they actually pay you with certainty. Costco can’t do that anymore, not after a 500% rally over the last 10 years that led to this ludicrous valuation.
Costco is a phenomenal company. One of the best ever. But even perfection has a price — and this one is just too much.
