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Should you buy Costco (COST) stock in 2026?

2026-08-02 ·

COST: see the full analysis on Lubin Investment

Costco validates 7 of my 10 quality criteria: near-unmatched customer loyalty (92.2% renewal), but sales growth that is slowing below my threshold. The price, meanwhile, has barely moved: the stock trades at 53.6 times free cash flow, almost exactly its five-year average. My model still flags a 49.8% overvaluation. Here is why.

The trap almost nobody sees coming

Costco holds a special place in investors' minds: the warehouse where everyone has a card, where the lines discourage no one, where even critics of mass retail make an exception. That kind of reputation often leads to a dangerous shortcut: since the company is excellent, the stock must be a good buy at any price. That is exactly the confusion I refuse to make. A brilliant company bought too expensive remains a bad investment, and Costco is a textbook case for understanding why the two questions must be kept apart.

So I run Costco through the same filter as any other stock: is this a good business, first (the quality of the business, independent of its price); is this a good price, second, and entirely separate. For Costco, the two answers do not point in the same direction.

Is this a good business? Loyalty comes first

Costco validates 7 of my 10 financial criteria. The most impressive signal is not in the income statement, it is in a number very few companies on earth can claim: a 92.2% US membership renewal rate, across 82.9 million paid members. That number means that out of 100 people who paid for a Costco card last year, more than 92 chose to pay again this year, with no obligation to do so. Very few brands, in any sector, earn that kind of repeated loyalty year after year.

The best proof of this pricing power (the ability to raise prices without driving customers away) came in September 2024: Costco raised its annual membership fee for the first time since 2017, seven years without a single increase. The standard card went from $60 to $65, the Executive card from $120 to $130, a decision that affected roughly 52 million memberships. The fact that the renewal rate stayed above 90% after that increase is the real proof of loyalty: it is not just a stated intention, it is customer behavior verified on the ground.

On the most recent numbers, momentum is accelerating rather than slowing: in the third quarter of its fiscal 2026, comparable sales (sales at stores open more than a year, which exclude the effect of new openings) grew 9.8% company-wide, with net sales up 11.6% to $69.15 billion, the strongest quarterly figure the company has ever posted. Membership fee revenue climbed 14% in the second quarter of 2026, to $1.36 billion.

The real engine: fees, not merchandise

Here is the mechanic that explains everything, and that has to be understood before judging any Costco number: the company barely earns anything on what it sells you. Its free cash flow margin (the share of revenue that turns into cash actually available) is only 2.7%, a level that would scare off any investor on another stock, and that would seem to signal a fragile business. It is not a weakness at Costco, it is the model itself: the warehouse sells merchandise at a deliberately near-zero margin to attract and retain customers, and it is the annual membership fee, with almost no associated cost once a customer has signed up, that produces the real profit.

Understanding this mechanic changes how every other number reads. Cash return on capital employed (Cash ROCE, what each dollar reinvested in the business returns) reaches 27%, a very good level despite a tiny merchandise margin, precisely because membership fees weigh heavily on the bottom line with very little capital needed to collect them. Net income grew from $4.06 billion in 2020 to $8.10 billion in 2025, nearly doubling in five years, driven both by membership growth and fee increases, two engines far more profitable than selling merchandise itself.

The price: expensive, but no more than usual

Costco's P/FCF (price-to-free-cash-flow, the stock price divided by cash generated per share) currently stands at around 53.6 times. Taken alone, that number looks enormous: you are paying 53 years of that cash to own the stock. But before calling it a bubble, it has to be compared to its own past: Costco's five-year average sits around 54 times, almost exactly today's level. Over thirteen years, Costco's P/FCF has ranged from a low of 16 times to a high of 108 times, with a median near 39 times. Costco is therefore not living through an unprecedented bout of speculative mania: it trades, as it almost always has for years, at a rich multiple the market grants it continuously.

Why does the market pay such a price, year after year, without ever really discounting it? Because a model built on recurring membership fees, with 92.2% renewal, looks almost more like a software subscription than a classic retailer: the market prices that predictability the way it would price recurring revenue, not the way it would price an ordinary retail margin. It is a quality-perception multiple, not a one-off valuation accident.

Third step, the verdict: is it justified? This is where my model, which projects the five-year cash-per-share trajectory rather than relying on the observed multiple alone, diverges from the market's judgment. It puts the fair buy price at around $477, against a current price of $952, an overvaluation of 49.8%. The reason lies in a detail the raw multiple does not show: five-year sales growth reaches only 7.7% a year, below my 10% threshold, while the price itself has almost never come down. The market has paid the same quality premium for years without revising the price down as growth slowed slightly. My model, stricter than the market's habit, refuses that constant premium without an equivalent growth counterpart.

The real debate

The whole Costco thesis rests on a tension between two readings. The most recent momentum (comparable sales at 9.8%, the strongest quarter ever posted) suggests acceleration, not a slowdown, which could justify paying an even higher premium than the historical average. But my model reasons over a five-year trend, not the latest quarter, and that longer trend stays below my growth threshold. If you believe the recent acceleration marks the start of a new, durable phase, the model's discount is too harsh. If you think one good quarter is not enough to erase five years of moderate growth, my $477 buy price remains the benchmark to watch.

How I settle it

Costco is not a mediocre business posing as a great one: it is an excellent business, with a level of customer loyalty very few companies on earth can claim, whose price has simply never needed to fall to find a buyer. Both judgments coexist without contradicting each other: solid quality (7/10), a price that, by my strict model, leaves no margin of safety. I am not betting against Costco, I am marking a price, and waiting for it to come to me rather than paying full price for the loyalty premium. You can follow these numbers live on Costco's analysis page, and understand in detail how I calculate this fair buy price in my full methodology.

FAQ

Why is Costco's margin so low if the company is so profitable?

Costco sells merchandise at a deliberately near-zero margin (2.7% free cash flow margin) to attract and retain customers. The real profit comes from annual membership fees, with almost no associated cost once a member signs up, which explains a high 27% Cash ROCE despite a tiny merchandise margin.

Is Costco undervalued or overvalued in 2026?

By my model, it is overvalued by about 49.8%: my fair buy price sits around $477 against a price near $952. The quality of the business is not in question, it is five-year sales growth (7.7%/year), below my threshold, that does not justify the current premium in my view.

Has Costco's P/FCF ever been this high before?

No. At 53.6 times, it is almost identical to its five-year average (around 54 times). Over thirteen years, Costco has already reached a ceiling of 108 times. This is not a one-off excess, it is the level the market has continuously granted this model for years.

Is Costco's membership renewal rate really exceptional?

Yes: 92.2% renewal in the US across 82.9 million paid members, a level that stayed stable even after the first fee increase since 2017 (+$5 on the standard card, +$10 on Executive). Very few companies in any sector show that consistent a loyalty.

Should you buy Costco stock now?

My quality screen is positive (7/10), but my strict price model shows a 49.8% overvaluation that leaves no margin of safety at the current price. This is not personalized investment advice, do your own research before any decision.

Related reading

COST: see the full analysis on Lubin Investment

About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).