3 Reasons to Buy Costco Right Now, and 1 Reason to Avoid It

Costco reported 148.5 million cardholders and 82.9 million paid memberships in fiscal Q3 2026, with paid memberships up 4.1% and membership income up 10.7% after fee increases. The article highlights strong renewal rates of 92.2% in the U.S. and 89.7% in Canada, plus a 22-year streak of annual dividend increases and a $15 special dividend paid in January 2024. The main caution is valuation: Costco trades at 46.1x forward earnings, above many major tech stocks.

Analysis

The market is implicitly paying Costco for two assets that usually deserve separate valuation buckets: a recurring annuity-like fee stream and an embedded real-estate/format option. The first is the more durable moat; high renewal rates mean fee hikes are being absorbed by behavior, not just by inflation, so membership income can outgrow unit counts for several years even if traffic normalizes. That makes the equity less about retail comps and more about the probability-weighted durability of a cash engine that compounds with very little incremental capital.

The underappreciated second-order effect is competitive pressure on WMT and AMZN in the upper-income, bulk-purchase basket: Costco’s pricing power on basket anchors can force competitors to spend more on promotions to defend private-label and household-necessity share. But the real incremental growth option is urban density—multilevel formats reduce the binding constraint of parking-lot economics and could open new store clusters in markets where Costco previously had no viable footprint. If that format works, the terminal store-count ceiling gets pushed higher than the market likely models today.

The problem is that the stock price already discounts a lot of that excellence. At this valuation, even a clean operating print can disappoint if membership growth merely stays good rather than accelerating, because multiple support becomes the main driver of returns. In the next 3-6 months, the key catalyst is not earnings growth but whether investors continue to accept Costco as a quasi-quality-bond proxy; any broad de-rating in defensive growth should hit COST first because its premium is already extreme.

Contrarian take: the bullish case is probably right on fundamentals but wrong on timing. The stock’s recent drawdown suggests the market is starting to distinguish between business quality and entry price, and that transition can last for quarters. The best setup is not chasing the equity outright, but using any further 5-10% pullback to build exposure gradually; upside from here is likely steady and low-variance, while downside on multiple compression can be abrupt.

Key Decisions for Investors

• Do not add COST aggressively at current levels; prefer staged entry only on a 5-10% additional pullback over the next 1-3 months. Risk/reward is asymmetric to the downside because multiple compression can overwhelm mid-teens fundamental growth.
• Pair trade: long WMT / short COST for 3-6 months if you want retail exposure with lower valuation risk. WMT has more room for multiple re-rating from here, while COST remains the most crowded quality trade in the group.
• Sell downside hedges into strength: consider financing a small COST long with a 6-9 month put spread if the name rallies back toward prior highs. The stock’s volatility is low enough that hedging costs are manageable relative to expected compression risk.
• Relative-value long AMZN vs short COST on a 6-12 month horizon if you expect consumers to keep shifting discretionary spend toward convenience and delivery. AMZN has a better path to surprise on mix and operating leverage, while COST needs continued multiple support.
• For existing holders, trim 20-30% into any momentum-driven rally and recycle into higher-beta quality names such as MSFT or AAPL, where valuation is still rich but not as stretched versus growth durability.