Actions in Costco (NASDAQ: COST) have risen 229% over the past five years, providing the type of growth usually reserved for technology stocks. The company ranks as the fifth largest global retailer, with some of its biggest competitors including Walmart And Amazon.
Still, Costco appears to still have plenty of room to run. The retail giant’s stock price has soared more than 92,000% since its IPO in 1985, likely creating more than a few millionaires. However, the company is only just beginning its overseas expansion and has operated a lucrative subscription-based model.
So it’s not too late to invest in this retailer for the long term and benefit from its future. So here’s why Costco remains a millionaire manufacturer stock worth considering right now.
The power of a subscription model
Retail can be tricky industry, with many companies facing lower profit margins than other sectors. However, Costco has found a way around this problem, as its business depends more on memberships than product sales.
In a strategy similar to Amazon’s Prime membership, which has also seen exponential success, entering a Costco store requires shoppers to pay an annual subscription. While requiring consumers to pay to enter a grocery store could have gone very badly for the company, the opposite happened.
Costco has attracted millions of consumers over the years, charming them with access to quality products at wholesale price, all for a modest annual fee. The company’s commitment to this model has allowed it to amass nearly 75 million paid subscriptions, a figure that grew 8% year over year during its most recent quarter, the first quarter of its fiscal 2024. Meanwhile, Costco boasts a 90% renewal rate worldwide.
Costco’s success over the years has seen its finances skyrocket, with this chart showing how the company’s annual revenue, operating profit and free cash flow have increased since 2019.
Costco’s fiscal 2023 results best represent the company’s winning membership model and its positive effect on earnings. The retail company made more than $6 billion in profits during the year, with member contributions accounting for 73% of that amount.
Costco Stock Is Worth Its High Price
Costco almost always trades at a premium, represented by its high forward price-to-earnings (P/E) ratio of 53. This figure is higher than many of its competitors, with the same measurement for Walmart and Target at 28 and 15. Even Amazon’s is below 40.
However, I would say Costco is worth the price for investors willing to hold the stock for the long term. The data above shows that Costco has outperformed all of these companies in terms of stock market growth over the past five years. Additionally, Amazon beat its fellow retailers in terms of annual revenue and operating profit growth.
Additionally, Costco is just beginning its overseas expansion, which will likely continue to boost profits for years. The company operates 876 locations in 14 countries. However, Costco has six or fewer stores in six of these countries, representing enormous growth potential. And that’s not to mention the many regions the company has yet to enter.
For example, Costco opened its first location in China in 2019 and its second in 2023 after being delayed by the COVID-19 pandemic. Yet the company already has six stores in the East Asian country and has barely scratched the surface.
It is a similar situation in France. There are only two Costco warehouses in France, one of which opened last year, and both located near Paris. However, significant expansion potential remains in the European nation and many other countries.
In the third quarter of 2023, international revenue grew 9% year-over-year, outpacing domestic revenue growth of approximately 2%. The segment will likely continue to outperform domestic sales in the long term as Costco remains on its current growth trajectory.
Along with a solid growth history and a winning business model, Costco is a stock that could make you a millionaire if you’re willing to wait.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Cook has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Amazon, Costco Wholesale, Target, Walmart, and Walt Disney. The Motley Fool has a disclosure policy.
Could Costco be a millionaire stock? was originally published by The Motley Fool
