Is Costco stock getting too expensive? 2 things investors should consider before purchasing.

A thought investors should avoid Costco wholesale (EXPENSES -0.25%) may seem counterintuitive to many. In 2023, an Axios Harris poll ranked Costco as the nation’s second most admired brand. Product selection and low prices have ensured consistent sales growth for decades.

Despite these gains, investors are increasingly questioning whether Costco stock remains a worthy investment. In 2020 Warren Buffett Berkshire Hathaway closed a longtime stake in Costco, which Buffett later said was “probably a mistake.”

His ambivalence about closing the position may leave investors wondering what to do. When making a decision about Costco stock, consider these two things.

1. State of business

Costco has historically been one of the most successful retail promotions on a long-term basis. A $1,000 investment in March 1982 would be worth more than $1.5 million today, including dividends.

Moreover, he gained loyal fans among members of wholesale clubs. The company sells high-quality products at a price slightly above cost plus overhead. This approach has helped boost membership renewal rates to over 90% worldwide, and recent increases in membership fees don’t seem to have rattled customers.

The company opened 30 new warehouses in fiscal 2024 (ended Sept. 1), bringing its total to 890. Of these new warehouses, 23 are in the U.S. and the rest are in Costco’s overseas markets.

It is difficult to overestimate his international success. Other successful retailers including Walmart And Home Depot made costly mistakes in foreign markets due to cultural differences. But Costco’s low-priced products are just as well received in France or China as they are in the U.S., greatly expanding the company’s growth potential.

2. Financial indicators

Unfortunately, these successes will not attract growth investors. In fiscal 2024, revenue of $254 billion was up 5% from last year’s level. Also, net profit rose 17% in the period to nearly $7.4 billion as rising costs lagged slightly behind the company’s revenue growth.

This growth rate may make investors wary of its valuation. IN price/earnings ratio (P/E) of 54, stocks are higher than at any time since the bull market of the late 1990s. In addition, it became so highly valued that its P/E exceeded its P/E AmazonAnother historically expensive stock, currently trading at 45 times earnings.

The earnings multiple is a testament to the demand for high-quality stocks and the fact that Costco’s popularity and sound management are known to investors.

Unfortunately for potential investors, high growth prospects are not the reason for the company’s valuation. IN forward P/E If the reading is 50, the share price is likely outpacing the company’s growth and may indicate that it has more room for downside than upside in the short term.

Worse, the outlook is bleak if you want to wait for a lower share price. Its P/E hasn’t fallen below 30 since 2019, and its earnings multiple hasn’t reached 15 since the 2008-09 financial crisis!

COST PE ratio data on YCharts.

Even if such dire conditions return, it’s likely that other stocks on investors’ watch lists could have higher potential, further frustrating potential buyers. Therefore, those who decide they must own Costco must accept paying a premium. And this increases the likelihood of ineffectiveness S&P 500 Indexwhich makes the stock risky.

Should you buy shares?

When considering the health of Costco stock, you should probably stay on the sidelines.

This conclusion was not made lightly. The company is one of the best retailers. He has been able to offer quality products that customers want at low prices. This has helped increase member loyalty, as reflected in a membership renewal rate of over 90%, even though dues were raised with little fanfare.

Unfortunately, investors may have overpriced the strength and growth potential of Costco’s business. While the company will likely continue to grow, its P/E ratio of 54 is near an all-time high and leaves the stock with more downside potential than upside potential.

Without a major pullback, the likelihood of market-beating profits is too low to justify buying Costco at this time.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has positions at Berkshire Hathaway. The Motley Fool has positions and recommends Amazon, Berkshire Hathaway, Costco Wholesale, Home Depot and Walmart. The Motley Fool has disclosure policy.