Many stocks have soared recently, largely driven by enthusiasm in the tech sector for emerging artificial intelligence (AI) companies. But some areas of the market have been under pressure, and even some growth stocks are seeing their share prices retreat.
One such growth company whose share price is flailing right now is Costco Wholesale(NASDAQ: COST). The giant membership-based retailer has seen its share price tumble about 7% over the past year, despite the company’s solid sales and rising earnings.
Here’s why Costco stock remains a buy despite its shares’ recent decline.
Image source: Getty Images.
Investors are opting for flashy AI stocks these days, and some of the allure is understandable. AI leader Nvidia have experienced phenomenal sales and earnings growth, and its shareholders have been rewarded handsomely.
But, as the phrase goes, all that glitters isn’t gold. Some tech stocks are overpriced, and their rising share prices are making it harder to justify their premium price tags.
In comparison to many AI companies, Costco looks painfully boring. But it’s a good time to consider what Warren Buffett said once in one of his famous Berkshire Hathaway shareholder letters: “I will tell you now that we have embraced the 21st century by entering such cutting-edge industries as brick, carpet, insulation, and paint. Try to control your excitement.”
The joke he was making was that even in the 21st century, he was investing mostly in boring companies that continued to increase their sales and earnings. And Costco is doing just that. Its fourth-quarter sales rose 8% to $86.1 billion, and earnings per share increased 11% to $5.87, both of which beat analysts’ consensus estimates.
While discount warehouses may not be exciting, slow and steady growth is what makes companies truly great over the long term.
One thing that helps companies beat their rivals is by developing a competitive moat that’s not easily breached. Costco has one with its massive membership numbers and high renewal rates.
The company has about 80 million members worldwide and an enviable membership renewal rate of about 90%. That means that when members sign up to join Costco, they often stick around for a very long time.
That’s great news for Costco because unlike most retailers, Costco doesn’t make its profits from selling goods. Its profit comes from membership fees, which reached $1.7 billion in the fourth quarter — a very impressive 17% increase from the year-ago quarter.
What’s more, Costco enjoys 60% of the domestic warehouse club market. Also, more members than ever are signing up for the company’s more expensive Executive Membership (which costs $135 annually, compared to $65 for the Gold Star Membership), with signups increasing 11% over the past decade.
While Costco benefits from good economic times, owning shares can also serve as a hedge against difficult times. That’s because Costco members shop at the store to save money, and they view their memberships as a smart financial move for their budgets.
When difficult economic times come, or even during recessions, people don’t stop spending — they’re just more cautious about where they spend, and how much.
That works in Costco’s favor because shoppers buy a Costco membership to save money, and it’s likely they’ll cut other areas of their budget before they ditch their membership — hence the 90% renewal rates.
When you consider all this together, Costco’s 7% share price decline over the past year appears more like a blip than a significant long-term problem for the company. And with this temporary pullback, investors can purchase Costco stock at a relative discount.
Before you buy stock in Costco Wholesale, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Costco Wholesale wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $580,171!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,084,986!*
Now, it’s worth noting Stock Advisor’s total average return is 1,004% — a market-crushing outperformance compared to 194% for the S&P 500. Don’t miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Costco Wholesale, and Nvidia. The Motley Fool has a disclosure policy.
