Where Will Costco Stock Be in 5 Years?

2024 is shaping up to be a fantastic year for Costco (NASDAQ: COST) shareholders. The warehouse retailer's stock jumped 37% through early October compared to the 21% rally in the S&P 500 index. Costco hasn't even been the biggest winner in its industry. Walmart (NYSE: WMT) shares soared 53% in that period, suggesting that outsized returns aren't limited to Wall Street's favorite sectors like tech.

But are the market-thumping days behind for Costco investors, or can the stock still deliver for shareholders from here? Let's look at why you might be thrilled to have Costco in your portfolio over the next five years.

Winning where it counts

Costco's results in the past year showed off the dependability of this membership-based business. Comparable-store sales growth was impressive at 6% in the 12 months that ended in early September. Shoppers continued to pack its warehouses as they looked to save money during this inflationary period. Customer traffic was up 6%, management said in a late-September conference call .

Members increasingly splurged on luxury products as well. Costco's e-commerce segment, which tilts toward discretionary purchases like jewelry, consumer electronics, and gold, jumped 16% for the year and was up 19% in the most recent quarter.

Look for the retailer to extend that positive momentum over the next several years, including by selling more bulky items like furniture through the digital sales channel. And those excellent customer traffic numbers point to more market share gains ahead, both from its warehouses and its online division.

Profits and returns

Costco doesn't earn big profits. Its 3.7% operating margin is low even by retailing standards. Walmart and Target both beat Costco's profitability in recent months.

COST Operating Margin (TTM) data by YCharts

But Costco's earnings are more stable because they come primarily from subscriber fees rather than product markups. That means you don't have to worry as much about sharp slumps during recessions. Membership income in the past year improved to $4.8 billion from $4.6 billion and is likely to keep growing in the coming years thanks to the chain's recent fee hike.

Costco's management team directs most of this excess cash into keeping prices low, so investors shouldn't expect profitability to move meaningfully above the 4% rate that they've seen for years. Instead, look for sporadic but large one-time dividend payments that tend to occur every few years.

Sticker shock

The biggest risk with buying a high-performing business like this, which is winning market share and boosting cash flow, is in paying too high of a price. That's clearly a concern here. Investors are paying 54 times earnings for this business compared to 41 times earnings for Walmart. Costco is valued at 1.5 times sales as well, a record for this stock.

Investors worried about short-term returns might want to watch the stock for now if they're turned off by that high premium. Yet the biggest advantage of investing for the long term is that you have time for the stock to grow into its elevated valuation. Costco has earned its premium in the past decade by posting industry-leading sales growth, and investors can reasonably expect that trend to continue over the coming years. Consider purchasing the stock in thirds , though, given the rally in the stock market so far in 2024. Easing into a position in that way reduces the risk that you buy just before a market drawdown.

In any case, Costco stock is highly likely to be setting more records over the next few years as the business continues to satisfy its growing base of highly engaged shoppers. That's why it's a great choice for most investors' portfolios.

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Demitri Kalogeropoulos has positions in Costco Wholesale. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy .