What Are Costco’s Stock Prospects Today into 2026?  

TradingKey - Despite a rare year of underperformance (2019), Costco Wholesale (COST) has always been one of the most closely followed consumer retail stocks. Founded in 1983 and with a business model based on membership, Costco has typically posted steadily increasing same store sales over the years. However, due to its recent drop in stock price (January 2018-September 2019), there has been increased debate as to whether or not Costco's shares deserve to remain a permanent holding in long-term portfolios or if its premium price/earnings ratio leaves investors little margin for error.

Overview: A Well Established Company Confronting a New Market Paradigm

Costco operates a membership-based wholesale club model, where its primary income comes from annual dues paid to become a member rather than from the markup on the items sold. Costco has a very high membership renewal percentage (over 90 percent) and continues to see an increase in the number of customers who upgrade to the Executive Membership level. Hence, Costco earns revenue repeatedly before customers even begin their shopping trips, which allows Costco to continue to earn money from a predictable source of cash flow regardless of whether or not the economy is growing or contracting. 

Contrary to typical trends, Costco's stock has fallen so far in 2019 despite the S&P 500's rise in value. Also, answers to the question "What's driving Costco's stock lower?" have been drawn into question by market forces which appear to have migrated significantly to the online retail market.

Costco’s Valuation and Long-Term Returns

The unique membership model is a distinguishing feature of Costco's success compared to other retailers. Rather than relying upon direct product sales as their primary profit source (as does conventional retailing), Costco's primary source of income is derived from annual membership fees. This approach enables Costco to counter the cyclical nature of many retail businesses and offer lower prices than most conventional retailers.

Costco's quarterly earnings reports through FY2026 show continued success for the company, with growth in comparable sales regardless of inflation and a growing user base of Costco e-commerce customers. Additionally, despite an online membership renewal process, the company retains a membership renewal rate of 89%+ for all active members (i.e., all active membership cardholders who have not lapsed within the past twelve months), supporting the notion that the company's value proposition offers significant 'stickiness'.

Ownership Profile and Dividend Strategy

The institutional investment community represents the majority, over 70%, of Costco’s ownership interest, with well-known institutional investors, such as Vanguard, BlackRock, and State Street Corporation, holding significant positions in Costco. The significant presence of institutional investors in Costco indicates the level of confidence that these institutions have in Costco’s business strategies and financial condition.

Despite the fact that Costco’s dividend yield is below that of many Consumer Staple peers, the company has consistently increased its dividend every year and issued special dividends occasionally. These factors attract long-term investors who are more interested in Total Return than Yield Income.

Risks and Diverging Opinions

Costco’s strong operating structure does not exempt it from risk. Its current valuation is high in relation to its growth expectations and will be affected if same-store sales and/or membership renewals begin to slow down. Recently, one analyst has issued a rare “sell” recommendation on Costco stock due to its declining membership growth and increasing competition from other retailers, such as Sam's Club and BJ's Wholesale Club.

Some have argued that changing consumer behaviors, such as the decline in household size and the delay in family formation, will negatively affect the future demand for bulk items and may diminish one of Costco’s competitive advantages.

Investor Insight: Balance Growth with Valuation Discipline

For investors looking to invest in Costco for the long term, the case for doing so remains strong based on the following: consistent recurring revenue generated from membership fees; strong comparable store sales growth even during tough economic times; and the ability to execute operations in a disciplined fashion. Due to these characteristics, as consumer behavior continues to shift toward predominantly value-based purchasing decisions, Costco shares have proven to be more defensive in a challenging market environment.

While the current premium valuation and mixed short-term share performance indicate that long-term investors should exercise caution and maintain an awareness of valuation, the pullback experienced by Costco may present opportunities for long-term investors to continue accumulating or adding shares. Alternatively, investors with shorter-term investment horizons should keep their expectations low and continue tracking membership renewal rates and comparable store sales closely.

Overall, Costco will remain one of the cornerstone retail holdings in the investor’s portfolio, but at this time the current valuation requires investors to apply careful consideration in choosing the right time to invest and to set realistic expectations for future growth.