Costco's January Sales Surge Reinforces Operational Strength but Fails to Address Overvaluation Risks

What happened

Zacks Investment Research highlights Costco's January sales surge, attributing it to competitive pricing and e-commerce growth. DeepValue's report confirms robust operations with FY25 sales up 8% and Q1 FY26 membership fees rising 14% on strong renewal rates. However, global renewal faces headwinds from newer international markets and lower-retention digital sign-ups, indicating subtle pressure. At a P/E of 52x and EV/EBITDA of 32x, the stock trades at a premium multiple that embeds high expectations for sustained growth. This sales strength, while positive, does not mitigate the embedded risk of multiple compression if membership or comps wobble.

Implication

The sales surge validates Costco's operational model but does not alleviate the core overvaluation issue highlighted in the DeepValue report. Renewal rate pressures and rising capex could constrain earnings growth, making the high multiple unsustainable. Investors must closely monitor upcoming quarterly reports for stabilization in renewal rates and comp sales to avoid downside from multiple compression. The 'POTENTIAL SELL' rating suggests waiting for a pullback to the $860 attractive entry level or confirmation of accelerated growth without additional risks. Until then, deploying new capital here offers poor risk/reward compared to opportunities with similar quality but lower valuations.

Thesis delta

The January sales data reinforces the operational strength already documented in the DeepValue report but does not alter the fundamental overvaluation thesis. The 'POTENTIAL SELL' recommendation remains unchanged, as the stock price at ~$970 already reflects strong growth, leaving no margin for error. Investors should await a price correction or clearer signs of sustained membership stability before reconsidering the investment case.