One of the most versatile and adaptable retail stocks to own over the years has been Costco Wholesale (NASDAQ: COST). There's a lot to like about the business, which attracts value-focused shoppers and bargain hunters alike.
Consumers can stock up on essentials and splurge on discretionary purchases while in its massive warehouses. The business thrived during the pandemic, and it has continued to do well even amid inflation.
As a result, the retail stock has been soaring to new heights and is now at an all-time high of more than $840. Year to date, its shares are up by 28%. But given the stock's popularity and the business' continued growth, is it possible that it hits $1,000 this year?
Investors are paying a high premium for Costco's stock
The biggest impediment to Costco's stock reaching $1,000 might be its valuation: It isn't cheap. At 52 times its trailing earnings, that's well above the 28 times earnings investors are paying for Walmart's stock. Even compared to its historical price-to-earnings (P/E) multiple, there's no denying that investors are paying much more of a premium than they have in the past.
COST PE ratio data by YCharts.
For Costco's stock to reach a $1,000 valuation, the P/E multiple would need to rise to 62, based on its $16.15 earnings per share (EPS) over the trailing 12 months. If the company's EPS rises, then the P/E multiple would not need to be as high.
Odds are, however, that if the stock reaches $1,000 this year, that probably means Costco is around a P/E multiple of 60 -- a steep ask given that the business grew at a relatively modest 9% last quarter (for the period ended May 12). While that's a good growth rate in retail, investors should be demanding more for this kind of valuation.
A catalyst that could push it over the top
There is one card that Costco could play that could drive up some bullishness in the near term, potentially pushing it to a $1,000 valuation, and that's a hike to its membership fees. The company hasn't raised its membership prices since 2017, and it's a routine occurrence for the business.
It's a question of when, not if, the company will announce another increase to the fees. Costco might simply be putting off the decision until interest rates come down and the economy appears to be more favorable.
The company has always focused on providing consumers with tremendous value for their memberships and has resisted the urge to use inflation as an excuse to raise prices the way other businesses have. Remarkably, the company hasn't even raised the price of its iconic hot dog combo despite inflation.
If, however, rates come down this year and inflation becomes less of a concern for consumers, the announcement of an increase to the membership price could be coming. The big question is whether it happens this year, next year, or even further down the road. If it happens this year, then I think there's a good chance that bullishness alone drives the stock up to a $1,000 price tag.
Should you buy Costco stock today?
Costco is a great stock to hold for the long term. But if you aren't prepared to hold on for several years, you might want to consider waiting because the stock's rich valuation could lead to a bumpy road in the near future.
It looks due for a correction, even if it does end up hitting $1,000. It might just be a matter of time before a sell-off ensues. While Costco is a good business to invest in, that doesn't mean that paying any price for the stock is necessarily a good move -- investors are pricing in a lot of future earnings growth at the current valuation, which creates risk.
That's why while the business is solid, there could be better-value growth stocks to buy right now than Costco.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
