Costco (COST) Stock Drops 16% – Is This What Buy Analysts Think?

TLDR

• Costco stock fell to $946.11, its lowest closing price since late January, marking seven declines in eight trading sessions.
• The decline came on the heels of a mixed third-quarter earnings report in which earnings per share lagged by six cents, although revenue beat expectations.
• Analysts at Mizuho and Jefferies say Costco’s low-price strategy is key to member loyalty and long-term traffic growth.
• DA Davidson added Costco to its best-in-class list, citing the warehouse model’s strong competitive moat.
• The stock trades at about 42 times forward earnings, but Wall Street still expects double-digit earnings growth this year and next.

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Costco Wholesale (COST) has been going through a rough patch. The stock closed at $946.11 on Monday — its lowest closing level since late January — after falling in seven of the past eight trading sessions.

Costco Wholesale, Cost

This puts the stock roughly 16% below its record closing high of $1,094.32, which it hit earlier this month.

Despite the sell-off, Costco is still up about 10% year to date. But the recent decline has sparked debate: Is this a red signal or a buying opportunity?

Then the pressure started Costco Fiscal third quarter earnings released last Thursday. Earnings per share were six cents below Wall Street estimates. However, revenue beat expectations, and the broader business showed continued strength.

Comparable store sales were up 12% overall, largely due to strong fuel demand. Excluding gas, corporate stocks rose by 6.6%, slightly less than the 6.7% expected by analysts.

What analysts say

Mizuho analyst David Bellinger was not dismayed. He noted that Costco’s desire to keep prices low is at the core of its identity — it’s how the company keeps renewal rates and returning members high.

Jefferies analyst Corey Tarlow supported this view. “Increasing gas participation enhances member loyalty and repeat members, and supports both the companies in the near term and the strength of the ecosystem in the long term,” he wrote.

Yes, keeping prices low puts pressure on margins. But analysts see this as a deliberate trade-off, not a structural problem.

Michael Baker, an analyst at DA Davidson, added that he went further Costco To the company’s top list following the sale. He pointed to the competitive moat of the warehouse club model — the barriers to entry, the focused product assortment, and the predictable membership income.

Becker’s data tells an interesting story. Warehouse clubs make up just 5% of total U.S. retail, but they have grown 6% annually since 2007 and 11% annually since 2018 — far ahead of retail and grocery businesses overall.

“Costco has taken share from other warehouse clubs and in retail overall, growing 9% annually since 2007,” Baker noted.

Evaluation question

Not everyone is willing to back the truck. Baker himself cited evaluation as a concern. At roughly 42 times forward earnings, the cost isn’t cheap — even after slippage.

Some estimates place the trailing earnings multiple closer to 50 times, making some investors uncomfortable given the current macro backdrop.

However, the consensus on Wall Street calls for earnings growth at a rate exceeding 10% over the current and next fiscal years.

Costco has also returned $19.7 billion to shareholders through dividends over the past five years, plus another $3.2 billion in buybacks.

As of Monday’s session, COST was trading at around $949.50.