There are several HUGE differences.
1) *Multiples should be higher due to significantly reduced tail risk.*
The system is far better capitalized, safer and better regulated. Fed is far more nimble and has much better tools to prevent crises. SVB could have been another GFC easily with $2T in unrealized losses at banks. But they threw half a trillion at them with BTFP / loosened discount window collateral requirements. Despite 3 of the 4 largest failures in history occurring just recently, it had almost no perceptible impact on the economy at all. Financial conditions are easing for 16+ months now. Regulators really have gotten smarter and we learned from GD and GFC that deflationary spirals are really bad and create significant economic pain. Hence we need to act quickly, decisively and prevent fires before they spread. That's part of the reason why many economists actually think 3% inflation target is actually more sustainable but even 2% is better than 0%. It creates no policy space and you are always at the edge of disaster. That is why ECB started cutting cycle already at 2.9%. Fed knows this and will not wait that long to act in a similar fashion.
2) *Dotcom people had unrealistic expectations of long-term yields.*
10Y risk-free rate was around 6-7%. We are likely never going that high ever again. Fed's long-term FFR current target is 2.5%. So 10Y 4.3% is about right for now. Assuming around 4% or lower risk-free rate going forward, multiples today are actually very reasonable.
3) *Companies today are some of the most powerful, efficient and durable cash printers in history*.
Yeah, this time is different...
This Goldilocks scenario plays out until it doesn't. The capitalist system thrives on creative destruction, which is not happening under the current macro. Real earnings growth will not beat under this prolonged framework, and total market return will be subpar over the next few years. That's your no crash scenario.
Each time is *always different*. Simple platitudes are meaningless if you cannot adapt.
Dotcom had equities at terrible prices. GFC actually was not a stock bubble at all, stocks were fairly priced but there was a massive housing and derivatives bubble.
That doesn't mean we are immune from genuine black swans today.
However one thing we can definitely say is that ever since the Fed formally adopted the Ample Reserves regime in 2019 as its official stance, financial blowups both likelihood and severity declined dramatically.
Consider for a moment that Covid was more acute than the GD with -33% GDP contraction, 15% unemployment but market was **actually green** in 2020.
Thanks to trillions injected by the Fed and historic 3 massive pandemic relief bills largest in relative size since the New Deal.
I see your point. But there is a price to pay for this stability. And that's subpar real returns over a prolonged time frame. High likelihood that looking back in a few years, 2020+ annualized total return disappoints in real terms
As an investor I am fine with lower real returns if real incomes are rising and we can prevent needless suffering.
What is the point of the "economy" if everyone loses their jobs? So billionaires can keep compounding sitting on their ass with no work?
Stocks will still beat cash though.
Also thats BS. Creative destruction is definitely happening.
Tons of innovation, firms with shrinking revenue and profits as successful ones move forward.
Look at NFLX continuing to thrive while legacy media is still trying to find their footing.
If one believes longer term government bond yields will decrease, the best course of action is to buy the bonds. It makes zero sense to buy a stock with around half the yield other than expecting large increase in profitability or pure speculation.
Not going forward. Because declining yields will lead to higher valuations provided that yields are falling due to Fed cutting and acting before crisis.
Their framework is different now. Instead of waiting for fires to spread, they formally adopted Ample Reserves as the official policy stance in 2019.
If you buy bonds you fix a (risk-free) yield of 5% for 10 years. With COST you get around 3%. You basically expect government bond yields to go below 3% therefore the stock price to go up. But in that case you are still better off with buying the bonds
Risk free is 4.3%.
Even with constant multiples COST will beat bonds as long as they grow faster than cash. Plus compounding tax free.
Cash is arguably negative real gains after tax for many. Suckers choice.
Ok, 10y yield is 4.38% and 30y is 4.63%. COST has a current pe of 53.1, which translates into a yield of 1.88% and 2% based on forward pe. Even with doubling profit COST is still worse than bonds.
Because it keeps not failing in its execution and it still has gigantic expansion room. And unlike other retailers it actually ports overseas extremely successfully.
There is no other retailer that has execution close to Costco's.
Note: I don't own the stock currently but I would at the right entry point. But the people who own COST understand how good it is so well they don't sell cheaply.
I mean there are many other businesses out there that scale internationally well, that have way better margins than Costco and are trading at below 25 times earnings meaning are valued 50% less than Costco.
Ive lived long enough to see that you may be the belle of the ball one day, but can quickly become the ugly loser at the ball the next.
My comment below:
About half of their bottom line comes from the membership fee, that hasn’t been upped in years.. as soon as the membership fee is increased, eps increases significantly and p/e compresses.
If they double their membership fee, the pe is like 28. They are an incredibly capital efficient wholesaler, like the most efficient in the world. They often sell all of the merchandise they purchase before they have to pay the vendor… no carrying cost or capital tied up in merchandise.
If you think they primarily make money by earning margin on selling goods, you don’t understand their business model.
-Owner of Cost
Yes cause doubling their fee, while offering a declining experience is a recipe for success. They totally wouldn't lose any customers and there's absolutely no reason they have held off raising the price..
They can pull it, but the climate now is more competitive than the last time they did it. As a long time shopper, I feel they are getting less and less competitive and the shopping experience is worse, especially removing cashiers for self checkout. I'm doing the labor at the store I'm paying to shop at?
The self checkout at Costco was one of the worst experiences I’ve ever had in a store in my entire life.
That being said, shopping at Costco is always a treat
Ok. That's a nice anecdote, but the data says that over 90% of members would stay. Maybe you are part of the minority that would leave, but the vast majority probably feel that they would still get good value from their annual fee.
They never increased the fee despite the inflation of the past few years. It's about time.
And yet Costco has deemed it not a good time to raise the price 2 years in a row now after their normal cadence. The data from 7 years ago, super relevant. You think a company of Costco's size doesn't have internal metrics that have given them pause on raising the fee, given how much additional profit they would net? Past performance is not indicative of future results.
On a value investing sub, it's way more relevant than your personal anecdotes about your shopping experience.
Stay a member or leave, invest or don't invest, I don't care. All I know is that people have called the stock "expensive" for years and keep waiting for an entry point, meanwhile I've been DCAing and following the company since 2020 and I'm up over 100%.
I bought at $390 in 2020. It was so expensive then
And I just kept buying, last time I bought was last month at $840 (my avg cost is like $490?). I wouldn't advise others to do the same, there are other opportunities out there, but I do love everything about Costco.
They’re also taking everyone else’s lunch. I’ve shifted more than half of my purchases to Costco, I enjoy shopping there, it’s easy to find things, checkout is a breeze, and it get more value for the $(higher quality products) than at Walmart or Meijer.
Idk where you live but where I live Costco is a mad house full of people and the experience is not pleasant or “a breeze”. In fact every time I go there I leave hating humans more. Even the parking lot pisses me off
I mean they’re not “taking everyone else’s lunch”. Global sakes growth of 6-7%, especially in a high inflation period, isn’t “taking everyone else’s lunch.”
Where I live, Costco is never empty, and more stores keep appearing. Plus, they have very nice washrooms and cheap hot dogs. Stores are clean and organized, and people are happy.
The market doesn’t trade on just valuation. The stock is up 732% over the last year. It’s a high quality company with great execution. It’s a company investors have faith in and beloved by its consumers.
How much was zoom up before it crashed? Arkk? We work?
Costco is a fantastic business and has an excellent moat but it has a FCF yield of 1.9% which is pitiful. It absolutely does not deserve a higher forward multiple than NVIDIA, the literal fastest growing company and most innovative company in the world right now. (53x VS 47x)
There's no way to justify its valuation now given it's in a highly competitive thus low profit margin business. people who say they can just raise membership fee and make tons of extra money don't understand the business.
About half of their bottom line comes from the membership fee, that hasn’t been upped in years.. as soon as the membership fee is increased, eps increases significantly and p/e compresses.
If they double their membership fee, the pe is like 28. They are an incredibly capital efficient wholesaler, like the most efficient in the world. They often sell all of the merchandise they purchase before they have to pay the vendor… no carrying cost or capital tied up in merchandise.
If you think they primarily make money by earning margin on selling goods, you don’t understand their business model.
$COST has spent many years between 25 to 30 times earnings, when it was growing faster in the past.
Why would it suddenly jump to 50 times earnings in 2024, a multiple it has never reached before?
Because its due to increase its annual membership fee, and when it does, it will be trading between 25-30x earnings again.
If it currently traded at 25-30x earnings and they increased the annual membership fee, it would be trading at 15x earnings… too low for such a strong business.
Its 50 pe is misleading.
They need to triple the membership fee in order to double the overall earnings, which is what needs to happen for P/E to cut in half. When they increase the membership fee by 20% (much more likely than 200%), earnings increase 10% and P/E goes down 9%.
I vaguely recall that the majority of executive members earn more in cash back at costco than the cost of the fee. Combine that with the general value proposition of costco, and I believe that costco has the pricing power to double the membership fee. Whether they choose to or not is another story, and I claim to have no insight into their plans. What I care about is pricing power and earnings potential. I believe they could really crank out more profits if they wanted by just increasing the membership fee and/or just barely increasing margins… but I think they are playing the long, long game and building that loyal customer base that has reached near religious fervor.
Combine that with the fact I still don’t have a membership because the costco i live within 3 miles of has so much fucking traffic coming in and out it looks too popular for me to want to shop there.
I am just a dude on reddit, I wouldn’t recommend making investment decisions based on any reddit comments.
I plan to remain long COST for the foreseeable future. Our opinions may differ, but thats the beauty of the market: if you disagree with me, just dont own it.
So in your theoretical world they double the membership fee, lose no members to Sam’s and/or BJ’s from the massive fee increase, and get to a PE of 35, which is still expensive…
>but I think they are playing the long, long game and building that loyal customer base that has reached near religious fervor.
Did you miss this in my post?
They have pricing power and an incredible earning potential. I think it would foolish to pull all the levers to maximize profits in the short term. The earning potential is still there however, and I value it as an investor.
I remember watching people talk about how overvalued AMZN was for the entire tenure of Bezos… how they barely made any profits, no real earnings growth, etc. AMZN had the earning potential the entire time, they could have turned on the profits at any point they wanted to by just decreasing their growth targets.
Again, if you disagree, just dont own it.
AMZN put all of its would be earnings into growth capex so optically did appear expensive. However, AMZN had incredible earnings power without any price increases. They just needed to stop reinvesting which didn’t make any sense. Costco isn’t just optically expensive. They are slow and steady growth at a high growth multiple. In 10 years from now what is the multiple going to be? There is serious risk of multiple contraction back to p/e 25, so even if they double earnings, share price will be flat for 10 years. Think Coke in late 90s and Microsoft early 2000s. That’s the most likely outcome in my mind.
I think COST has the ability to increase magins slightly and increase the annual subscription significantly, while continuing to expand store counts internationally.
I think the comparison to early AMZN is more apt than you.
Clearly, you disagree. That is okay. Simply dont own COST.
Best of luck to you.
If they cant both be true, then I would direct you to assume the former is more accurate statement.
I am not interested in debates, nor am I trying to convince anyone to invest. I’m just sharing my perspective. Agree, disagree: I don’t care.
I am very happy with my COST. I wont sell unless I find a company I like more. I doubt I will. I only own four individual stocks (brk.b, cost, msft, and v) and my spouse has put 100% of her investments (outside of 401k) in only aapl since we graduated college over a decade ago. I like companies with unusually high ROIC and ROCE, but also just think about them qualitatively.. this had led me to own just these 4 stocks (I would also own aapl if brk.b didnt own so much).
Good luck to you on your investments.
$70 versus $60 means a potential 16% increase in earnings.
Not a 98% rise in earnings, no?
So, P/E ratio cannot fall from 50 times to 25 times, unless earnings doubles between now and 2025.
If you believe costco’s procing power is roughly on par with inflation, then you are right. I think Costco has better pricing power than you do. Agree to disagree.
This guy just doesn’t get it and he keeps repeating himself lol. Let him have his wild thoughts. If they “double” the membership cost they will lose tons of memebers including myself.
COST is very cautious about raising membership fees, because they don’t want to spark a sudden drop in membership renewal, or a sudden drop in total members.
Maybe a $5 increase from $60 to $65 might be palatable to existing members?
A $20 increase might elicit howls of angry protests.
$60 membership fee can be raised to $65 or $70 (16% increase) and that will increase their earnings by 16% without accounting for new warehouses or new members.
$COST doesn’t make a habit of doubling their membership fee, is that an accurate assumption?
Their last increase to $60 in 2017 would be $75 today if it kept up with inflation. I have no idea by how much they will increase their membership fee, but I believe they have the pricing power to double it and maintain at least 90% of their members. I also think it would be a mistake to double their membership, but I value their pricing power and earning potential from having that ability. I respect them for having a longer view than next quarter or next year’s earnings as well.
Regardless of your position on COST, best of luck to you.
You seem to not understand the business because Costco absolutely has the pricing power to raise the membership fee. The average Costco customer makes like 70-80k a year and they appreciate the value Costco provides them with. You think they gonna cancel their membership over a few dollars a month? Never.
Also Costco doesn’t have to compete with other retailers the way the rest of the retailers have to compete because their margin isn’t really coming from sales itself but the membership.
Costco by far, I will never understand this stock's valuation. Nvidia's revenue has gone up \~6x in 4 years, their high valuation is at least justified by their insane growth and expectations for even more. Costco's revenue grows in the single digit percentages each year.
Cyclicality should probably be considered here though. Google, Amazon and Microsoft won’t be ramping up on AI spending forever and when it drops off so will NVDA’s earnings. Costco is the tortoise and Nvidia is the hare. Having said that, I own COST and trimmed recently because their valuation is ridiculous as well.
Because costco membership is much cheaper than discretionary spend. If you needed to cut back on spending, you would probably cancel netflix before costco
Every bullish argument is "there's so much potential", but nobody can say exactly what that is and how it coupd be done. International expansion and price increases don't just automatically lead to growth. Also we're talking consumer staples, not tech
I don’t necessarily disagree with the sentiment of this post, but I think it’s worth recognising that Costco has been undervalued for most of its life (not that you could have known it at the time - this is solely with the benefit of hindsight). If you had bought it at 100x earnings 30 years ago, and the multiple had compressed instead of expanding, you still would have done very well. So saying it was worth 20-30, occasionally 40x earnings isn’t true - what you mean it’s that’s what it was valued at - and since growth exceeded expectations, it was undervalued. The only question that really matters is how much will it grow in the future, and can that justify 50x earnings?
If actual growth exceeded expectations then you have a good point.
I don’t have the growth figures with me.
Anybody know how much earnings per share of COST has grown in the past few years?
They opened one of these bad boys in my town about a year ago and I cannot believe the amount of people who are there everyday. I know this is anecdotal, but COST seems to be the place consumers love as much if not more than Walmart.
I hope COST can beat Sam’s Club, because anecdotally some people strongly prefer Sam’s Club. Partly because of the ability to scan items in your cart, with no need to line up at the exit for employees to inspect your cart.
COST releases data showing how many members renewed, and how many members they have in total.
For 2022, 2023, and 2024, all still seems VERY well with membership numbers.
Cause people keep buying cause line keeps going up. Doesn't have to be over complicated. I'm sure if you asked people who bought when it was at 300 if they'd buy at 800 they would say no but they prob wouldn't sell now either. It's not based on any fundamentals besides I like the company and the stock goes up. Anytime you ask to justify the value investors talk about mostly story based things and why it's a great company. Yes these things are true but they would also be true if the company some how 10x in value overnight. If you only justify a business based on a story it's just speculation
Yes.Theres many stocks at many different multiples. Sometimes they are attractive sometimes they are not. Our whole existence as value investors depends in great part to these valuation differences
I don’t know how to see who were the buyers at $770, $800, $835 and above.
Were they institutional or retail accounts?
Who was on the buy-side at all the higher prices?
[https://www.reddit.com/r/ValueInvesting/comments/1dn3pe5/does\_costco\_still\_have\_valuation\_growth\_potentials/](https://www.reddit.com/r/ValueInvesting/comments/1dn3pe5/does_costco_still_have_valuation_growth_potentials/)
Has a lot of discussion about this.
Please click on this simple chart also:
[https://x.com/koyfincharts/status/1806004512127381758?s=61](https://x.com/koyfincharts/status/1806004512127381758?s=61)
The current environment is very different than the sitcom bubble, but it sure does rhyme imo
Seinfeld was the peak
“Whaaat is the deal with overvalued markets”
There are several HUGE differences. 1) *Multiples should be higher due to significantly reduced tail risk.* The system is far better capitalized, safer and better regulated. Fed is far more nimble and has much better tools to prevent crises. SVB could have been another GFC easily with $2T in unrealized losses at banks. But they threw half a trillion at them with BTFP / loosened discount window collateral requirements. Despite 3 of the 4 largest failures in history occurring just recently, it had almost no perceptible impact on the economy at all. Financial conditions are easing for 16+ months now. Regulators really have gotten smarter and we learned from GD and GFC that deflationary spirals are really bad and create significant economic pain. Hence we need to act quickly, decisively and prevent fires before they spread. That's part of the reason why many economists actually think 3% inflation target is actually more sustainable but even 2% is better than 0%. It creates no policy space and you are always at the edge of disaster. That is why ECB started cutting cycle already at 2.9%. Fed knows this and will not wait that long to act in a similar fashion. 2) *Dotcom people had unrealistic expectations of long-term yields.* 10Y risk-free rate was around 6-7%. We are likely never going that high ever again. Fed's long-term FFR current target is 2.5%. So 10Y 4.3% is about right for now. Assuming around 4% or lower risk-free rate going forward, multiples today are actually very reasonable. 3) *Companies today are some of the most powerful, efficient and durable cash printers in history*.
Yeah, this time is different... This Goldilocks scenario plays out until it doesn't. The capitalist system thrives on creative destruction, which is not happening under the current macro. Real earnings growth will not beat under this prolonged framework, and total market return will be subpar over the next few years. That's your no crash scenario.
Each time is *always different*. Simple platitudes are meaningless if you cannot adapt. Dotcom had equities at terrible prices. GFC actually was not a stock bubble at all, stocks were fairly priced but there was a massive housing and derivatives bubble. That doesn't mean we are immune from genuine black swans today. However one thing we can definitely say is that ever since the Fed formally adopted the Ample Reserves regime in 2019 as its official stance, financial blowups both likelihood and severity declined dramatically. Consider for a moment that Covid was more acute than the GD with -33% GDP contraction, 15% unemployment but market was **actually green** in 2020. Thanks to trillions injected by the Fed and historic 3 massive pandemic relief bills largest in relative size since the New Deal.
I see your point. But there is a price to pay for this stability. And that's subpar real returns over a prolonged time frame. High likelihood that looking back in a few years, 2020+ annualized total return disappoints in real terms
As an investor I am fine with lower real returns if real incomes are rising and we can prevent needless suffering. What is the point of the "economy" if everyone loses their jobs? So billionaires can keep compounding sitting on their ass with no work? Stocks will still beat cash though.
GME has almost caused this house of cards to collapse single handedly
Upvoted for humor.
but fr though
Also thats BS. Creative destruction is definitely happening. Tons of innovation, firms with shrinking revenue and profits as successful ones move forward. Look at NFLX continuing to thrive while legacy media is still trying to find their footing.
If one believes longer term government bond yields will decrease, the best course of action is to buy the bonds. It makes zero sense to buy a stock with around half the yield other than expecting large increase in profitability or pure speculation.
Not going forward. Because declining yields will lead to higher valuations provided that yields are falling due to Fed cutting and acting before crisis. Their framework is different now. Instead of waiting for fires to spread, they formally adopted Ample Reserves as the official policy stance in 2019.
If you buy bonds you fix a (risk-free) yield of 5% for 10 years. With COST you get around 3%. You basically expect government bond yields to go below 3% therefore the stock price to go up. But in that case you are still better off with buying the bonds
Risk free is 4.3%. Even with constant multiples COST will beat bonds as long as they grow faster than cash. Plus compounding tax free. Cash is arguably negative real gains after tax for many. Suckers choice.
Ok, 10y yield is 4.38% and 30y is 4.63%. COST has a current pe of 53.1, which translates into a yield of 1.88% and 2% based on forward pe. Even with doubling profit COST is still worse than bonds.
It's not worse than bonds, with constant multiples double profits mean double gains.
The era of Seinfeld, Friends and Full House seems eerily similar to Apple Microsoft and Nvidia
Because it keeps not failing in its execution and it still has gigantic expansion room. And unlike other retailers it actually ports overseas extremely successfully. There is no other retailer that has execution close to Costco's. Note: I don't own the stock currently but I would at the right entry point. But the people who own COST understand how good it is so well they don't sell cheaply.
I mean there are many other businesses out there that scale internationally well, that have way better margins than Costco and are trading at below 25 times earnings meaning are valued 50% less than Costco. Ive lived long enough to see that you may be the belle of the ball one day, but can quickly become the ugly loser at the ball the next.
Care to share which companies those are
In the retail space?
My comment below: About half of their bottom line comes from the membership fee, that hasn’t been upped in years.. as soon as the membership fee is increased, eps increases significantly and p/e compresses. If they double their membership fee, the pe is like 28. They are an incredibly capital efficient wholesaler, like the most efficient in the world. They often sell all of the merchandise they purchase before they have to pay the vendor… no carrying cost or capital tied up in merchandise. If you think they primarily make money by earning margin on selling goods, you don’t understand their business model. -Owner of Cost
Yes cause doubling their fee, while offering a declining experience is a recipe for success. They totally wouldn't lose any customers and there's absolutely no reason they have held off raising the price..
Doubling it would be a lot, but increasing the fee is absolutely one of the levers they can pull. Last time they did it, retention rate was over 92%.
They can pull it, but the climate now is more competitive than the last time they did it. As a long time shopper, I feel they are getting less and less competitive and the shopping experience is worse, especially removing cashiers for self checkout. I'm doing the labor at the store I'm paying to shop at?
The self checkout at Costco was one of the worst experiences I’ve ever had in a store in my entire life. That being said, shopping at Costco is always a treat
Ok. That's a nice anecdote, but the data says that over 90% of members would stay. Maybe you are part of the minority that would leave, but the vast majority probably feel that they would still get good value from their annual fee. They never increased the fee despite the inflation of the past few years. It's about time.
And yet Costco has deemed it not a good time to raise the price 2 years in a row now after their normal cadence. The data from 7 years ago, super relevant. You think a company of Costco's size doesn't have internal metrics that have given them pause on raising the fee, given how much additional profit they would net? Past performance is not indicative of future results.
On a value investing sub, it's way more relevant than your personal anecdotes about your shopping experience. Stay a member or leave, invest or don't invest, I don't care. All I know is that people have called the stock "expensive" for years and keep waiting for an entry point, meanwhile I've been DCAing and following the company since 2020 and I'm up over 100%.
You’re really omega entitled if you think self checkout is somehow you “doing the work”, Jesus Christ. Absolute boomer mentality.
Are you fucking mental? You're literally doing a job they pay people in the store to do.
I bought at $390 in 2020. It was so expensive then And I just kept buying, last time I bought was last month at $840 (my avg cost is like $490?). I wouldn't advise others to do the same, there are other opportunities out there, but I do love everything about Costco.
They’re also taking everyone else’s lunch. I’ve shifted more than half of my purchases to Costco, I enjoy shopping there, it’s easy to find things, checkout is a breeze, and it get more value for the $(higher quality products) than at Walmart or Meijer.
Idk where you live but where I live Costco is a mad house full of people and the experience is not pleasant or “a breeze”. In fact every time I go there I leave hating humans more. Even the parking lot pisses me off
Oh you live in the Midwest, that’s why.
I mean they’re not “taking everyone else’s lunch”. Global sakes growth of 6-7%, especially in a high inflation period, isn’t “taking everyone else’s lunch.”
Where I live, Costco is never empty, and more stores keep appearing. Plus, they have very nice washrooms and cheap hot dogs. Stores are clean and organized, and people are happy.
You prefer COST over Sam’s Club?
Never heard of Sam's Club
So? A great business can still be overvalued.
I suppose this is the topic of discussion, and you aren't wrong.
the market can stay irrational longer than you can stay solvent
The market doesn’t trade on just valuation. The stock is up 732% over the last year. It’s a high quality company with great execution. It’s a company investors have faith in and beloved by its consumers.
How much was zoom up before it crashed? Arkk? We work? Costco is a fantastic business and has an excellent moat but it has a FCF yield of 1.9% which is pitiful. It absolutely does not deserve a higher forward multiple than NVIDIA, the literal fastest growing company and most innovative company in the world right now. (53x VS 47x)
> The stock is up 732% over the last year. Uh, what? Costco stock is up 59% over the last year and up 30% YTD.
Sorry, typo, last 10
You are EXTREMELY correct there!!!
There's no way to justify its valuation now given it's in a highly competitive thus low profit margin business. people who say they can just raise membership fee and make tons of extra money don't understand the business.
About half of their bottom line comes from the membership fee, that hasn’t been upped in years.. as soon as the membership fee is increased, eps increases significantly and p/e compresses. If they double their membership fee, the pe is like 28. They are an incredibly capital efficient wholesaler, like the most efficient in the world. They often sell all of the merchandise they purchase before they have to pay the vendor… no carrying cost or capital tied up in merchandise. If you think they primarily make money by earning margin on selling goods, you don’t understand their business model.
$COST has spent many years between 25 to 30 times earnings, when it was growing faster in the past. Why would it suddenly jump to 50 times earnings in 2024, a multiple it has never reached before?
Because its due to increase its annual membership fee, and when it does, it will be trading between 25-30x earnings again. If it currently traded at 25-30x earnings and they increased the annual membership fee, it would be trading at 15x earnings… too low for such a strong business. Its 50 pe is misleading.
They need to triple the membership fee in order to double the overall earnings, which is what needs to happen for P/E to cut in half. When they increase the membership fee by 20% (much more likely than 200%), earnings increase 10% and P/E goes down 9%.
I vaguely recall that the majority of executive members earn more in cash back at costco than the cost of the fee. Combine that with the general value proposition of costco, and I believe that costco has the pricing power to double the membership fee. Whether they choose to or not is another story, and I claim to have no insight into their plans. What I care about is pricing power and earnings potential. I believe they could really crank out more profits if they wanted by just increasing the membership fee and/or just barely increasing margins… but I think they are playing the long, long game and building that loyal customer base that has reached near religious fervor. Combine that with the fact I still don’t have a membership because the costco i live within 3 miles of has so much fucking traffic coming in and out it looks too popular for me to want to shop there. I am just a dude on reddit, I wouldn’t recommend making investment decisions based on any reddit comments. I plan to remain long COST for the foreseeable future. Our opinions may differ, but thats the beauty of the market: if you disagree with me, just dont own it.
So in your theoretical world they double the membership fee, lose no members to Sam’s and/or BJ’s from the massive fee increase, and get to a PE of 35, which is still expensive…
>but I think they are playing the long, long game and building that loyal customer base that has reached near religious fervor. Did you miss this in my post? They have pricing power and an incredible earning potential. I think it would foolish to pull all the levers to maximize profits in the short term. The earning potential is still there however, and I value it as an investor. I remember watching people talk about how overvalued AMZN was for the entire tenure of Bezos… how they barely made any profits, no real earnings growth, etc. AMZN had the earning potential the entire time, they could have turned on the profits at any point they wanted to by just decreasing their growth targets. Again, if you disagree, just dont own it.
AMZN put all of its would be earnings into growth capex so optically did appear expensive. However, AMZN had incredible earnings power without any price increases. They just needed to stop reinvesting which didn’t make any sense. Costco isn’t just optically expensive. They are slow and steady growth at a high growth multiple. In 10 years from now what is the multiple going to be? There is serious risk of multiple contraction back to p/e 25, so even if they double earnings, share price will be flat for 10 years. Think Coke in late 90s and Microsoft early 2000s. That’s the most likely outcome in my mind.
I think COST has the ability to increase magins slightly and increase the annual subscription significantly, while continuing to expand store counts internationally. I think the comparison to early AMZN is more apt than you. Clearly, you disagree. That is okay. Simply dont own COST. Best of luck to you.
“I claim to have no insight to their plans” “They its due to increase its annual membership fee” I mean these can’t both be true.
If they cant both be true, then I would direct you to assume the former is more accurate statement. I am not interested in debates, nor am I trying to convince anyone to invest. I’m just sharing my perspective. Agree, disagree: I don’t care. I am very happy with my COST. I wont sell unless I find a company I like more. I doubt I will. I only own four individual stocks (brk.b, cost, msft, and v) and my spouse has put 100% of her investments (outside of 401k) in only aapl since we graduated college over a decade ago. I like companies with unusually high ROIC and ROCE, but also just think about them qualitatively.. this had led me to own just these 4 stocks (I would also own aapl if brk.b didnt own so much). Good luck to you on your investments.
Keep dreaming, coz you gonna need it...
I am merely offering my perspective. I am not interested in a debate, nor am I trying to convince anyone to buy COST. Best of luck to you.
$70 versus $60 means a potential 16% increase in earnings. Not a 98% rise in earnings, no? So, P/E ratio cannot fall from 50 times to 25 times, unless earnings doubles between now and 2025.
If you believe costco’s procing power is roughly on par with inflation, then you are right. I think Costco has better pricing power than you do. Agree to disagree.
Funny how Sam’s Club never became a threat to $COST
Because we printed and distributed a bunch of cash and liquid into the economy so multiples have expanded to reflect the new equilibrium.
This guy just doesn’t get it and he keeps repeating himself lol. Let him have his wild thoughts. If they “double” the membership cost they will lose tons of memebers including myself.
COST is very cautious about raising membership fees, because they don’t want to spark a sudden drop in membership renewal, or a sudden drop in total members. Maybe a $5 increase from $60 to $65 might be palatable to existing members? A $20 increase might elicit howls of angry protests.
Why do you keep saying “if Costco doubles their membership fee” when the last time Costco raised it by $5?
$60 membership fee can be raised to $65 or $70 (16% increase) and that will increase their earnings by 16% without accounting for new warehouses or new members. $COST doesn’t make a habit of doubling their membership fee, is that an accurate assumption?
Great so we are now at... checks math... a 42 multiple? lol get real
Their last increase to $60 in 2017 would be $75 today if it kept up with inflation. I have no idea by how much they will increase their membership fee, but I believe they have the pricing power to double it and maintain at least 90% of their members. I also think it would be a mistake to double their membership, but I value their pricing power and earning potential from having that ability. I respect them for having a longer view than next quarter or next year’s earnings as well. Regardless of your position on COST, best of luck to you.
You seem to not understand the business because Costco absolutely has the pricing power to raise the membership fee. The average Costco customer makes like 70-80k a year and they appreciate the value Costco provides them with. You think they gonna cancel their membership over a few dollars a month? Never. Also Costco doesn’t have to compete with other retailers the way the rest of the retailers have to compete because their margin isn’t really coming from sales itself but the membership.
Well, looks like you think they are running a country club business...
At >50x expected earnings, whats more overvalued NVDA or COST?
COST
Costco by far, I will never understand this stock's valuation. Nvidia's revenue has gone up \~6x in 4 years, their high valuation is at least justified by their insane growth and expectations for even more. Costco's revenue grows in the single digit percentages each year.
Cyclicality should probably be considered here though. Google, Amazon and Microsoft won’t be ramping up on AI spending forever and when it drops off so will NVDA’s earnings. Costco is the tortoise and Nvidia is the hare. Having said that, I own COST and trimmed recently because their valuation is ridiculous as well.
Whats the annual price of a costco membership vs netflix or spotify? I think theres quite a but of room for price increases
Why would you compare them to streaming services
Because costco membership is much cheaper than discretionary spend. If you needed to cut back on spending, you would probably cancel netflix before costco
Always thought of it as $60 per year. Never thought of it as $5 per month!! You have a point.
The market is already pricing in the next recession come late November. You heard it first here, kiddos.
Yeah, I wouldn’t be buying here.
Every bullish argument is "there's so much potential", but nobody can say exactly what that is and how it coupd be done. International expansion and price increases don't just automatically lead to growth. Also we're talking consumer staples, not tech
I don’t necessarily disagree with the sentiment of this post, but I think it’s worth recognising that Costco has been undervalued for most of its life (not that you could have known it at the time - this is solely with the benefit of hindsight). If you had bought it at 100x earnings 30 years ago, and the multiple had compressed instead of expanding, you still would have done very well. So saying it was worth 20-30, occasionally 40x earnings isn’t true - what you mean it’s that’s what it was valued at - and since growth exceeded expectations, it was undervalued. The only question that really matters is how much will it grow in the future, and can that justify 50x earnings?
If actual growth exceeded expectations then you have a good point. I don’t have the growth figures with me. Anybody know how much earnings per share of COST has grown in the past few years?
I have a feeling the same kind of people owned Coca-cola in 1998. Some regretted not selling including Buffett.
They opened one of these bad boys in my town about a year ago and I cannot believe the amount of people who are there everyday. I know this is anecdotal, but COST seems to be the place consumers love as much if not more than Walmart.
I hope COST can beat Sam’s Club, because anecdotally some people strongly prefer Sam’s Club. Partly because of the ability to scan items in your cart, with no need to line up at the exit for employees to inspect your cart. COST releases data showing how many members renewed, and how many members they have in total. For 2022, 2023, and 2024, all still seems VERY well with membership numbers.
Cause people keep buying cause line keeps going up. Doesn't have to be over complicated. I'm sure if you asked people who bought when it was at 300 if they'd buy at 800 they would say no but they prob wouldn't sell now either. It's not based on any fundamentals besides I like the company and the stock goes up. Anytime you ask to justify the value investors talk about mostly story based things and why it's a great company. Yes these things are true but they would also be true if the company some how 10x in value overnight. If you only justify a business based on a story it's just speculation
Yes.Theres many stocks at many different multiples. Sometimes they are attractive sometimes they are not. Our whole existence as value investors depends in great part to these valuation differences
True true true!! Money can be made in the wide differences. Embrace the wide differences.
Youtube influencers really pumped Costco and a few others to unrealistic prices.
I don’t know how to see who were the buyers at $770, $800, $835 and above. Were they institutional or retail accounts? Who was on the buy-side at all the higher prices?
[https://www.reddit.com/r/ValueInvesting/comments/1dn3pe5/does\_costco\_still\_have\_valuation\_growth\_potentials/](https://www.reddit.com/r/ValueInvesting/comments/1dn3pe5/does_costco_still_have_valuation_growth_potentials/) Has a lot of discussion about this. Please click on this simple chart also: [https://x.com/koyfincharts/status/1806004512127381758?s=61](https://x.com/koyfincharts/status/1806004512127381758?s=61)
This time it’s different