Costco Wholesale Crop (NASDAQ:COST)
Costco Wholesale Corp (COST) is a US-based big-box retail store. With a market cap of over $250 billion, Costco is the 4th largest retailer in the world, coming in just behind Home Depot, Walmart, and Amazon. Costco offers a huge variety of products, ranging from fresh meat to long-life pantry staples. Over the past day, mentions of Costco have shot up an impressive 64.71%, signaling that investors could be wondering whether Costco is a good investment. Currently (26/04/22), the price of Costco is hovering around $553, down around 1.6% YTD.
Is Costco a Good Investment - Positives
Costco is a worldwide name boasting a myriad of exciting financial numbers. To help our readers decide whether Costco is right for them, we’ve included a few of the main reasons why Costco is a worthwhile investment.
Costco’s membership program is an excellent way of building sustainable, predictable, high-margin revenue. While the program only makes up around 2% of the company’s total sales, it actually makes up a huge 77% of their bottom line. Because of this, Costco is able to sell its products with a razor-thin margin, attracting more customers to its ecosystem.
Over the past few years, Costco has been enjoying excellent growth metrics. Across a 5-year period, the big-box retailer’s share price has increased by 278% equating to a year-on-year average of 56%, perfectly in line with last year's 55% increase.
The cash conversion cycle is the amount of time it takes a retailer to convert supply to cash. Costco’s numbers are particularly impressive. In fact, they’re negative, meaning that customers are paying for products before they’re even on shelves. This means that Costco is able to operate its 828 stores while having minimal funds tied up in inventory, allowing them to spend more money expanding.
Costco has been making a clear effort to expand. The number of warehouses it operates increased by almost 40% from 592 in 2011 to 828 today. Combine this with a recent expansion into both China & New Zealand and it seems likely that Costo is only going to continue growing over the coming years.
As financial markets get hammered and interest rates go sky-high, things aren’t looking particularly bright for the global economy. While this is likely to wreak havoc for luxury brands, Costco should continue chugging along just fine. When people have plenty of money they want to go shopping, when the purse strings are tight, they want discounts. Therefore, Costco as a budget retailer should have little trouble weathering a bit of economic turmoil.
Is Costco a Good Investment - Negatives
Despite boasting impressive statistics, Costco, like every investment, has its own set of risks. Here are a few things to consider before buying Costco stock.
Investors seem to be flocking to Costco, in turn pushing its share price to a rather high valuation. Historically, Costo has traded for a price-to-earnings ratio of around 36, however, today this number is closer to 46 times. While there are a plethora of reasons for this valuation, it does show us that it might not be the best time to build a position in Costco.
While it's true that slowly pushing all-time highs is how a stock increases in value, Costco’s shares have been increasing faster than its cash profits. Because of this, its valuation is becoming increasingly based on growth metrics, infrastructure, and buyer sentiment. While this isn’t inherently negative, it's a clear sign that Costco is on its way to becoming overvalued.
Hype Asset of the Day - Conclusion
All said and done, Costco boasts solid financials and shows no signs of slowing down its growth any time soon. It’s a solid longer-term bet that should be fairly low risk. However, as things stand, due to a price-to-earnings ratio almost 25% higher than historical figures, it’s advisable to dollar-cost-average into a position rather than rushing things. If you’re interested in receiving more trending stocks and cryptocurrencies direct to your inbox, you might want to check out our premium plans. Alternatively, if you’d like to learn more about the services offered by HypeIndex, head over to our FAQ page.
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