Costco Stock Is Expensive, But for Perfectly Fine Reasons

Costco (NASDAQ:COST) is an incredible retail machine. COST stock keeps on going up and up; it has nearly doubled since the beginning of 2020 and it’s up more than 200% over the past five years. This has started to attract some naysayers who say that Costco should be selling off like so many other companies that saw business surge during the pandemic. As the likes of Peloton Interactive (NASDAQ:PTON) and Zoom Video (NASDAQ:Z, NASDAQ:ZM) have crashed back to Earth after their 2020 rallies, why hasn’t Costco pared back its gains? There’s a good answer to this question.

Costco is an incredibly consistent business. That’s true both from a decades-long perspective and, more narrowly, since the pandemic started. Since the 1990s, Costco has reliably opened a similar amount of new stores each and every year, gradually adding more cities, customers and local economies to its network. The steady pace of growth has led to incredible scale effects and a working system to keep reinvesting capital. Costco has rewarded shareholders not only with massive share price gains but also increasing dividends, both ordinary and special.

That’s all well and good, but wasn’t Costco supposed to slow down by now? After people stocked up during the pandemic, sales of many consumer staples items have tailed off significantly, taking down their associated producers with them. And yet Costco is still putting up double-digit revenue growth. A big part of this is due to inflation. Costco has a reputation for low prices; in fact, it promises not to charge more than a 15% markup on goods versus its own cost. This gives customers confidence to shop at Costco during this period of rapidly escalating headline inflation. Costco also sells gasoline at lower prices than peers, which has been a big traffic driver lately given the historic surge in gas prices over the past year.

Now, Costco is set to benefit from its customer loyalty. The company has a tradition of raising its club membership fees around once every five years. The five-year anniversary of Costco’s last price hike will be upcoming this summer, so an announcement on that front could be forthcoming. With inflation running red hot, Costco has the ability to push through a significant increase on its pricing. Also, on the topic of inflation, there’s one other fun kicker to the COST stock story.

Unlike most retailers, Costco owns most of the land and buildings which house its stores. Thanks to sharply rising land prices, the value of Costco’s owned real estate is appreciating significantly. That doesn’t matter to near-term operating results, but it’s a nice underappreciated tailwind to the Costco story.

Now sure, COST stock is at 43 times this year’s estimated earnings. That could certainly come in a little bit if the stock market pulls back more in coming months. However, the valuation isn’t nearly as wild as it might seem at first glance. The company is doing just about everything right, after all, despite unprecedented economic volatility.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.