As Wall Street eagerly awaits Nvidia’s (NVDA) latest earnings report, investors are shifting focus to another market giant—Costco Wholesale (COST). While the wholesale retailer has been a long-time favorite for its consistent growth and loyal membership base, Christopher Bloomstran, president and chief investment officer of Semper Augustus Investments, believes its valuation has reached unsustainable levels.
Costco vs. Magnificent 7: A Surprising Valuation Gap
Bloomstran, renowned for his analysis of Warren Buffett’s Berkshire Hathaway (BRK.B), highlighted Costco’s meteoric rise in his latest investor letter. Despite being one of his top holdings, he expressed concerns over its elevated price-to-earnings (P/E) multiple, which now sits at 56.9x. He compared this to the collective P/E ratio of the so-called Magnificent 7—Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (META), Nvidia (NVDA), and Tesla (TSLA)—which trades at a significantly lower 33.1x earnings.
From a price-to-sales (P/S) perspective, Costco appears even more expensive, capitalizing its 2.9% profit margin at 165% of sales. Meanwhile, the Magnificent 7 stocks, despite their strong performance, trade at an aggregate 8.7x sales—making them look like a relative bargain.
A High-Growth History, But What’s Next for Costco?
Bloomstran admitted that Costco has been a stellar performer, compounding at an impressive 19.7% annually over his firm’s 21-year holding period. However, he warns that the retailer’s rapid expansion may not justify its current valuation. With store footprint growth at just 2.5% annually, total sales growth projections range between 6% and 7.5% per year.
His valuation models paint a cautious outlook for the next five years:
- Bear case: 6% sales growth, 3% margins → 2.4% annual loss
- Base case: 6.5% sales growth, 3.2% margins → 3.1% annual return
- Bull case: 7.5% sales growth, 3.5% margins → 5.6% annual return
Even in the most optimistic scenario, these returns fall well below historical market averages, leading Bloomstran to argue that Costco’s sky-high multiple is unsustainable.
Market Parallels to the Dot-Com Bubble?
Bloomstran draws a striking comparison between today’s market and the late 1990s, when tech stocks reached euphoric valuations before the dot-com crash. He warns that beyond the Magnificent 7, other large-cap names like Eli Lilly (LLY) and Walmart (WMT) are also trading at extreme levels.
Yet, he sees opportunity elsewhere—particularly in mid- and small-cap stocks, as well as international and emerging markets, which he believes are trading at more reasonable levels compared to their mega-cap counterparts.
Stock Market Outlook: Mixed Signals Ahead
As investors process these valuation concerns, broader market sentiment remains uncertain. U.S. stock futures dipped after the S&P 500 (SPX) closed at its lowest level since mid-January, while Bitcoin (BTCUSD) slid below $90,000. Meanwhile, 10-year Treasury yields (BX:TMUBMUSD10Y) continued their decline, signaling potential headwinds for equities.
Key Takeaways:
- Costco’s P/E ratio (56.9x) is higher than the Magnificent 7 average (33.1x), despite its modest 2.9% profit margin.
- Historical stock growth has been strong, but forward-looking projections indicate limited upside.
- Market dynamics resemble the late 1990s tech bubble, with several large-cap stocks trading at stretched valuations.
- Investors may find better opportunities in smaller-cap, international, and emerging markets.
As Nvidia’s earnings loom, all eyes remain on the tech sector, but Costco’s valuation raises fresh concerns over what investors are willing to pay for growth. Will Mr. Market bring rationality back to Costco’s stock price, or will it continue defying gravity? Only time will tell.
