Costco's Engagement Trends Affirm Business Strength, But Valuation Clouds Investment Case

What happened

Costco's recent report of strong traffic gains and digital engagement highlights its value-driven model and loyal member base, as noted in a Zacks Investment Research article. This aligns with the DeepValue master report's data showing high member renewal rates over 90% in key markets, underpinning a recurring revenue stream of $5.3 billion in FY25. In Q1 FY26, the company posted solid results with sales up 8% and EPS of $4.50, supported by digital comparable sales increasing 21%, indicating operational excellence. However, the report critically notes that despite this performance, the stock trades at elevated valuations of ~46x P/E and ~28x EV/EBITDA, with a conservative DCF suggesting intrinsic value less than half the current price. Thus, while the traffic growth confirms member engagement strengths, it does not address the core investment concern of overvaluation in a mature, low-margin business.

Implication

The positive traffic and digital engagement data underscore Costco's ability to maintain high member loyalty, which drives its profitable membership fee income and supports steady cash flow. However, with the stock priced at premium multiples, any deceleration in comparable sales or membership metrics could lead to significant multiple compression, heightening downside risk. For current shareholders, this news may offer short-term reassurance but does not alleviate valuation concerns, suggesting that trimming positions to de-risk is advisable rather than adding exposure. New investors should avoid entering at current levels, as the risk/reward is unattractive without a material pullback or growth acceleration that justifies the high price. Long-term monitoring should focus on membership renewal rates and digital trends, but the primary overhang remains valuation, not operational weaknesses, necessitating a cautious stance.

Thesis delta

The news of traffic growth and digital engagement is consistent with the DeepValue report's assessment of Costco's strong member metrics and operational performance, confirming existing strengths in its business model. Therefore, there is no significant shift in the investment thesis, which remains a 'POTENTIAL SELL' due to excessive valuation that embeds years of high growth, leaving little margin for error despite the company's quality.