Costco’s Ascent: A Warehouse of Dreams

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Many years later, as the algorithms began to predict the inevitable saturation of the American appetite for bulk-sized mayonnaise and discounted tires, old Manuela remembered the scent of damp earth clinging to the first shipment of imported avocados that arrived at the Costco warehouse in 1983. It was a smell that promised abundance, a premonition of the empire that would rise from the concrete and steel, an empire now reflected in the shimmering, almost feverish, climb of its stock. Costco Wholesale (COST 0.30%) recently reported January sales, a whisper of growth in the digital currents, and the market, predictably, responded with a fervor bordering on the ecstatic. Digital sales, they say, grew 34% year over year – a number that feels less like a statistic and more like a prophecy fulfilled, a testament to the relentless march of convenience.

The shares, having briefly tasted the cold air of a minor correction, now hover around a 15% gain year to date. It is a climb fueled, not by revolutionary innovation, but by the enduring human desire for a good deal, for the illusion of control over the rising cost of living. The recent numbers echo a strength seen in the last quarter, a subtle shift in consumer behavior, a tentative return to spending on items that once signaled prosperity – jewelry, gleaming appliances, things that shimmer and promise a life beyond the everyday. Investors, naturally, are pleased, for these are the margins that fatten portfolios, the whispers that turn into roars on Wall Street.

However, a seasoned eye, one accustomed to the cyclical nature of markets and the capricious whims of fortune, cannot help but notice the increasingly precarious height of this ascent. The stock now trades at a price-to-earnings (P/E) multiple of 53, a figure that feels less like valuation and more like a challenge to gravity. Even when viewed through the optimistic lens of forward earnings estimates, the P/E remains stubbornly high, at 49. It is a number that suggests the market is not merely pricing in future growth, but anticipating a miracle.

Indeed, while digital sales offer a glimmer of hope, total net sales are still growing at a modest pace – 9% year over year for January, 8% in the fiscal first quarter ending November 23rd. It is a respectable rate, to be sure, but hardly the explosive growth required to justify such a lofty valuation. Earnings per share have grown at an annualized rate of 11% over the past three years, and analysts predict long-term earnings growth of around 9%. A solid, dependable return, yes, but hardly the stuff of legends. One looks at the Magnificent Seven, at consumer staples like Coca-Cola and Procter & Gamble, and finds a more reasonable equilibrium, a better alignment between price and potential.

The market, it seems, is demanding flawless execution, a continuation of Costco’s remarkable track record. And Costco, undoubtedly, excels at the mundane magic of logistics, at the art of moving vast quantities of goods with astonishing efficiency. But it is also demanding robust earnings growth, a surge in profitability that, at present, remains elusive. As a portfolio manager, I find myself increasingly cautious. The stock is priced for a dream, a perfect future that may never fully materialize. It is a beautiful dream, to be sure, but dreams, as we know, are often fragile things. A watch list, perhaps, is the wisest course. Patience, and a lower valuation, may yet offer a more compelling opportunity. The scent of damp earth, after all, can also foreshadow a coming storm.

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2026-02-23 01:23