Costco's International Growth Highlighted, But Valuation Risks Loom Large

What happened

Zacks Investment Research reports that Costco's international segments now outpace U.S. growth, driving global sales and warehouse expansion. This aligns with Costco's strategy in recent filings, where international markets are a key focus for aggressive warehouse openings and revenue diversification. However, the DeepValue master report rates Costco as a 'POTENTIAL SELL' due to its rich valuation of ~48x trailing P/E, which embeds unrealistic growth expectations and leaves little margin for error. Critical risks include slipping renewal rates and the need for constant-currency comps to remain above 3% to avoid multiple compression, as noted in the report's downside scenarios. While international growth is promising, it must sustainably boost earnings without exacerbating cost pressures or competitive threats to justify the current stock price.

Implication

The accelerated international expansion underscores Costco's ability to tap into underpenetrated markets, potentially supporting long-term revenue growth and mitigating U.S. saturation risks. However, at current stock prices, much of this growth is already priced in, limiting upside unless EPS growth accelerates significantly beyond the base case of ~11%. Renewal rate erosion and potential comp slowdowns could trigger multiple compression, outweighing international gains and aligning with the bear case valuation of ~$730. Investors should closely monitor upcoming quarterly reports for signs of sustainable comps and membership fee growth in international segments, as well as management's execution on cost controls. Without a pullback in price or clearer evidence of margin expansion from international operations, the risk-reward remains unfavorable, supporting the report's cautious stance.

Thesis delta

The news reinforces international expansion as a key growth pillar, but it does not alter the core investment thesis that Costco's high valuation requires flawless execution. No shift is warranted; the thesis still hinges on sustained mid-single-digit comps and stable renewal rates, with international success being a necessary but not sufficient condition to justify the current multiple.