Costco Stock Lagging the Market: Time to Buy the Dip?

Costco's shares are trailing the broader market in 2025—sparking debate among investors about whether this retail giant is a hidden gem or a value trap.

Behind the Underperformance

While mega-cap tech stocks race to new highs, Costco's steady-but-unspectacular growth has left it in the dust. The warehouse retailer's model—built on bulk sales and razor-thin margins—isn't exactly screaming 'disruption' in an era of AI mania and instant gratification.

The Bull Case: Defensive Play in Volatile Times

Membership fees provide predictable revenue, and inflation-weary shoppers flock to value. Costco's cult-like customer loyalty isn't something you can code into an algorithm—yet.

The bearish take? Maybe the market's just bored of a company that would rather count pennies than promise pie-in-the-sky projections. Sometimes the most innovative thing in finance is... not losing money.

Verdict: In a market high on hype, Costco's grounding—or stagnation—depends on your appetite for reality.

Image source: Getty Images.

Consistently strong growth

Costco's most recent quarterly report showed healthy momentum. Revenue ROSE 8% year over year and comparable sales increased 5.7% (8% when excluding gasoline price and foreign exchange changes). E-commerce continued to be a bright spot, rising 14.8% in the quarter. Operating income improved, and earnings per share increased to $4.28 from $3.78 a year ago, reflecting both steady sales growth and expense discipline. Importantly for a membership model, membership fee income grew 10% to about $1.24 billion.

It is also worth noting that high renewal rates and growing executive memberships continue to support fee income, which provides a cushion in tougher retail environments. Gary Millerchip, Costco's chief financial officer, emphasized on the latest quarterly earnings call that membership fee income rose double digits and renewal rates remained above 92% in the U.S. and Canada -- evidence that members continue to see value in the Costco offering.

The cadence of monthly updates shows how consistent the company's robust growth is. In its August sales release, Costco reported fourth-quarter net sales up 8% and full-year fiscal 2025 net sales up about 8%. Comparable sales increased 5.7% for the quarter and 5.9% for the year, with e-commerce up 13.6% in the quarter and mid-teens for the year. These are meaningful rates for a retailer of Costco's size and speak to steady member engagement across geographies and categories.

Overall, Costco's latest results show a business that is still expanding warehouses, growing comps, and deepening member relationships.

The real issue is valuation

Ultimately, though, the investment debate centers on price. Even after trailing the S&P 500 this year, the shares still trade at a price-to-earnings ratio in the mid-50s. That multiple may not seem expensive when viewed next to Costco's track record, but it does imply that much of the company's ongoing strength is already priced in. At this valuation, investors are paying a staggering premium relative to most large retailers, with a dividend yield that remains modest (even when including the company's occasional special dividend).

What could cause me to revisit this conclusion? Faster-than-expected earnings growth, driven by a reacceleration in comps, or outsized operating leverage from digital and logistics investments WOULD help justify today's price.

But a sky-high valuation leaves little room for some of the risks. Competitive intensity across retail and grocery is always high, making it difficult to predict how well Costco can maintain its outsized performance over peers over the long haul. Additionally, pricing actions by peers or prolonged tariff impacts could affect margins. Further, any slowdown in discretionary categories could weigh on the higher-ticket side of Costco's assortment, even as staples remain steady. These dynamics, combined with a premium valuation, could prove to be unrewarding if results merely meet expectations.

Therefore, while Costco remains a terrific company, the stock may still be priced for perfection. For investors who already own shares, holding makes sense given the model's resilience and the company's long runway for warehouse growth and membership expansion. New investors, however, might prefer to wait for a more attractive entry point -- one that offers a clearer margin of safety and better aligns the return profile with the underlying fundamentals.