Can Costco Reach a Trillion-Dollar Market Cap by 2030?

As of now, there are only nine companies that belong to the exclusive trillion-dollar club. Most of these companies thrive in the technology sector. However, there is one retail giant that has the potential to join this elite group: Costco (COST).

Over the past five years, Costco's stock has soared by 236%, significantly outpacing the S&P 500. This raises the question: can Costco achieve a trillion-dollar market cap by 2030? Let’s explore what investors should keep in mind.

Key Strengths

Costco is not the world's third-largest retailer by chance. It possesses several traits that contribute to its success. Understanding these key characteristics is vital for investors.

Firstly, Costco's size grants it a formidable competitive edge. The retailer benefits from its extensive revenue base and a carefully curated selection of products. This combination allows Costco to negotiate better deals with suppliers, resulting in lower prices for customers.

Additionally, customer loyalty plays a significant role in Costco's success. Offering high-quality merchandise at affordable prices is an effective strategy to attract shoppers. Furthermore, Costco operates a membership model, which not only ensures a steady income stream but also encourages repeat visits from members.

Lastly, Costco has demonstrated consistent financial performance. Over the past ten years, the company has reported an annual revenue growth rate of 8.5%, while its diluted earnings per share (EPS) have increased annually by 13.5%. The company tends to perform well regardless of economic conditions, whether facing fears of recession or inflation.

Growth Opportunities

Costco currently operates around 900 warehouses, with almost 70% located in the U.S. In fiscal 2024, the company plans to increase its footprint by adding 29 new locations, with a projected 26 more openings globally in the current fiscal year. This strategy pays off, as new warehouses often attract considerable customer traffic, boosting sales, profits, and memberships.

While it is uncertain how many total stores Costco might eventually have, there is still room for growth, especially in under-explored markets like China, as well as ongoing expansion within the U.S.

However, investors should set realistic expectations. Although growth potential remains, the pace of expansion is likely to slow compared to previous years. With more incremental revenue needed to significantly impact overall performance, the number of viable new locations may also begin to dwindle.

Wall Street analysts predict that Costco's revenue will increase at an annual rate of 6.9% over the next three years, which appears to be a reasonable outlook.

Valuation Challenges

For Costco to achieve a $1 trillion market cap by 2030, it would require a 126% increase in its market capitalization, translating to an annual growth rate of 14.5%. Notably, this demand for growth represents a significant slowdown compared to the previous six years, during which Costco's market cap surged by 349%.

While it’s plausible for Costco to continue expanding its revenue and EPS at a healthy rate, potential investors must be cautious of its current valuation. At present, Costco’s shares are trading at a price-to-earnings (P/E) ratio of 60—this is the highest since the company went public 39 years ago.

Given this situation, it’s likely that the P/E ratio will decrease in the following years, creating obstacles for satisfactory investment returns. Thus, the prospect of Costco reaching a $1 trillion market cap before 2030 seems unlikely.

The author has no positions in any of the stocks mentioned.

Costco, Investment, MarketCap