Is Costco’s Valuation a Ticking Time Bomb? Charlie Munger’s Final Warning Could Hold The Key...

This morning, let’s talk about Costco—the magical land where you can grab a $1.50 hot dog, a cup of Coke, and somehow manage to drop $500 on a trip that started with "just grabbing milk." 

But we’re not here to talk about how you convinced yourself that 24 rolls of aluminum foil was a good idea. Nope, Costco’s about to drop its Q4 earnings report on September 26th, and analysts are bracing themselves. Is this stock a piping hot deal, or is it about to cool down faster than your excitement when you check your receipt? Let’s find out.

Costco’s been on a heater this year, with its stock up 37%, on pace for its best year since... well, last year. But on the flipside, Costco’s valuation has been climbing right alongside its stock price. Right now, Costco is trading at 50.3 times its 12-month forward earnings, just shy of its all-time record of 51.2.

To put that into perspective, Costco usually hangs around a much lower 29 P/E ratio on average. So, yeah, we’re in uncharted waters. And let’s be honest, when you’re paying 50 times earnings for any stock, you start to wonder if it’s still a bargain or if you’re about to get smacked with the dreaded “buy high, sell low” curse.

So what do the experts think? Morgan Stanley’s Simeon Gutman raised Costco’s price target to $950, while Loop Capital is even more bullish with a $975 target. They’re banking on a 6.5% comp-store sales growth and a tiny-but-steady EBIT margin increase of 0.04 percentage points per year for the next decade. That’s some pretty optimistic long-term math, but hey, Costco hasn’t disappointed them yet.

On the flip side, some analysts are waving caution flags. Redburn Atlantic downgraded the stock from Buy to Neutral, mostly because the P/E is now in the stratosphere. Even Charlie Munger, Warren Buffett’s late right-hand man and Costco superfan, called it out last year: “The trouble with Costco is it’s 40 times earnings. But except for that, it’s a perfect damn company.” Spoiler alert: it’s now 50 times earnings, Charlie.

Here’s the thing: Costco’s not your average retail stock. Target and Dollar Tree have been whining about how inflation is eating into their margins and crushing consumer spending. Meanwhile, Costco’s laughing all the way to the bank. In August alone, global net sales grew 7.1%, with U.S. sales up 6.7%. That’s double the rate of overall U.S. retail sales, according to Evercore ISI analysts. Oh, and their e-commerce sales? Up 23.3%. It’s almost like inflation doesn’t exist in the Costco universe.

Then there’s the membership model. Costco recently hiked its U.S. and Canada membership fees by $5, pushing Executive Memberships to $130 a year. And people aren’t even blinking. That 2% cash back is now capped at $1,250 instead of $1,000, which is basically Costco saying, “Yeah, we know you’re gonna spend your life savings here.”

Now, let’s get back to that valuation. Is it justified? Morgan Stanley seems to think so, with Gutman saying the 50x P/E is rational “exuberance.” But even he admits that at some point, valuation will matter. Remember when Amazon was about to crush Costco by acquiring Whole Foods in 2017? Yeah, no one’s losing sleep over that anymore. But paying 50x earnings for a stock that used to trade at 25x does make you wonder how much more gas is left in the tank.

If you’re feeling a little uneasy, you’re not alone. While Costco’s business model is bulletproof—high membership renewals, steady sales growth, and no sign of slowing down—its stock price is starting to feel like it’s running on borrowed time. Even the most loyal Costco fanatics might be tempted to lock in some profits.

Costco’s stock is hotter than a rotisserie chicken fresh out of their deli, but that heat might just burn you if you’re not careful. Analysts are playing the Goldilocks game here—some think it’s too hot, others say it’s just right. Either way, come September 26th, Wall Street will make its final judgment and we’ll see if the wealthiest investors in the world think Costco is overvalued.

P.S. While analysts continue to play “Goldilocks” with Costco’s valuation ahead of its upcoming earnings report…

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Stock.News has positions in Coca-Cola.