When consumers look for value, a trip to Costco Wholesale (NASDAQ:COST) is frequently on the agenda. But as investors have been looking for value in December, COST stock has fallen out of favor. Shares of Costco stock are down about 2.2% for the month as of December 27. However, the stock is down over 6% after hitting a high of around $1,007 prior to the company’s earnings on December 12.
Trading at over 52x forward earnings and with a return on equity of around 33%, investors may be correct in thinking that it’s time to take some profits off the table. Even with the December slide, COST stock is still up about 42% in 2024, which outpaces the S&P 500 index and other retail stocks.
But with the recent inflation indicators showing that consumers will continue to deal with higher prices in 2025, is there more upside for Costco stock? Let's look at the reasons why COST is still a buy.
1. Customer Retention Remains Strong
In September 2024, Costco increased its membership fee for the first time in seven years—about two years later than the timeline of past price increases.
Historically, Costco has enjoyed a retention rate of over 90% when it has increased its membership fee. However, there were legitimate concerns about this increase as consumers are looking to cut costs wherever they can.
So far, those concerns look unfounded, as the company is seeing no significant loss of membership. In fact, it reported a 7.75% increase in membership in the quarter. Furthermore, Costco expects to realize most of the financial benefits from the increase, which will go right to the company’s bottom line in 2025 and 2026.
2. Expansion Plans Continue
In the past year, Costco has opened 17 new brick-and-mortar stores, bringing its total to just shy of 900 stores across 14 countries. 80% of those stores are in North America, highlighting an opportunity for future growth.
But the company’s expansion is not just about its bricks-and-mortar footprint. It is also making strides in its e-commerce business. In its most recent quarter, the company reported a 21% increase in its e-commerce business, supported by a 32% increase in downloads for the company’s mobile app.
And building out its e-commerce business will also create opportunities for Costco to target its customers in a new way with an ad network the company is building.
3. Significant Cash Balance Generation
A common denominator of almost every successful business is a fortress balance sheet. In addition to the company’s revenue and margin growth, Costco reported a 10% year-to-date increase in its cash balance, which now stands at nearly $11 billion.
The company has net cash relative to debt and is on track to pay a special dividend in early 2026. And keep in mind the company already has a 21-year streak of increasing its dividend in addition to the $4 billion share repurchase program Costco announced in January 2023 which has two years left.
Bonus Reason: The Stock May Split Again in the Future
With Costco stock trading near $1,000 per share, analysts asked the company’s management about the possibility that the company’s board of directors may authorize a stock split in 2025. The retailer has split its stock three times before, but not since 2000.
Although a stock split doesn’t change a company’s valuation, it can make the stock more attractive and accessible to investors who prefer to buy stock in whole shares. In fact, one motivation that Walmart (NYSE:WMT) Inc. NYSE: WMT cited when it split its shares in January 2024 was the ability for Walmart employees to buy full shares.
Costco has stated it has no immediate plans to split its stock, citing the accessibility of fractional shares for employees and retail investors. While this is a valid perspective and there’s no indication of declining trading volume, the company hasn’t ruled out the possibility entirely. A strong performance in the stock price could prompt a reconsideration in the future.