Costco is one of top retailers in the world, and there's plenty of room for it to get even bigger in a decade.
Just five years ago, Costco Wholesale (COST -0.70%) had a market cap of around $120 billion. Since then, the stock has gone on to soar in value and is now worth more than $360 billion. That's incredible growth that you don't often see from a retail stock. Amid the pandemic, Costco established itself as one of the most adaptable and versatile stocks to own in retail. From discretionary purchases to day-to-day essentials and to online sales, it has been able to grow in many different ways.
But the retail stock, up 45% in the past 12 months, is a pricey buy right now; it may be difficult for it to find much more room to rise higher. Given its impressive growth, however, is it probable that the stock ends up tripling again and reaches a $1 trillion market cap within the next 10 years? Let's take a look to see how likely that may be.
Two areas which could be huge growth catalysts for Costco
Building a bullish case for Costco isn't terribly hard given how well the company has been performing in recent years. Its online business is growing, and the company has been expanding and continuing to open new warehouses in different parts of the world.
And those are the two big levers the company can pull on today: online sales and international growth. In its most recent period, which ended on July 7, Costco reported total company sales growth of 5.3% when compared to the same period last year. It's a strong growth rate, but one area which is particularly promising is e-commerce where comparable sales grew by 18.4%. The company offers same-day delivery in some markets. Over the next 10 years, I expect its online presence to continue growing, since that segment will be a huge catalyst for the business's top line.
The other big opportunity is in international growth. As of May 12, the company had 876 warehouses, but 86% (752) of those were located in the U.S., Canada, and Mexico. With many untapped markets to expand into, Costco's business still has plenty of room to grow internationally.
In its most recent fiscal year, which ended on Sept. 3, 2023, Costco reported annual revenue totaling $242.3 billion. In three years, its top line has jumped by 45%. And with more growth catalysts still out there to capitalize on, there could be a lot of potential for Costco's sales to go even higher and for its valuation to rise as well.
A high valuation may be just a temporary problem
The biggest reason why Costco's stock may struggle, at least in the near term, has to do with its valuation. It's trading 50 times trailing earnings, which is extremely expensive when you consider low-cost retailer Walmart is trading at a multiple of just 30.
Costco's stock comes at a premium, and with that come heightened expectations. There's a risk that it fails to meet those expectations and that investors adjust what they are willing to pay for the stock, especially if the markets tumble and the economy goes into a recession.
But if the company continues to achieve significant revenue and profit growth, the stock could still be in an excellent position to rally higher in the years ahead. And that's why the problem related to valuation could prove to be a temporary one for Costco investors.
Is Costco stock a buy?
Costco's stock isn't cheap, but for long-term investors, it can still make for an excellent investment. Given the company's plentiful growth opportunities, there's plenty of reasons to remain bullish on the stock in the long haul. While it may face a correction in the near term to bring its valuation down a bit, Costco is a stock which looks unstoppable.
The odds look good that in a decade, Costco could be a trillion-dollar stock, and investors who invest in the business today and remain patient could stand to earn some great returns.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy.
