Costco's High Valuation Curbs RBC Enthusiasm in New 'Sector Perform' Rating

RBC Capital Markets initiated coverage of Costco Wholesale (NASDAQ: COST) with a neutral Sector Perform rating and a $1,000 price target, calling the company "one of the best stories in retail" but cautioning that its premium valuation limits the potential for significant stock price appreciation.

A 'Best in Retail' Business Model

RBC analyst Steven Shemesh praised Costco's formidable competitive advantages, including its consistent market share gains and a loyal, high-income customer base. The firm's analysis estimates Costco gained 67 basis points of market share in 2024 and is on track to gain another 77 basis points in 2025.

The core of Costco's strength lies in its membership model, which drives over 50% of its operating profit, according to RBC. A worldwide membership renewal rate of approximately 89.7% provides a high degree of earnings per share (EPS) visibility and stability.

Growth Levers and Shareholder Returns

RBC identified several avenues for future growth. The firm's data science analysis suggests Costco has the potential to open up to 660 additional stores in the United States. Furthermore, its e-commerce business, with a digital penetration of 10% versus 16% for club peers, remains in its "relatively early innings."

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These factors, combined with improving online economics and a growing retail media business, could support high-single-digit to low-double-digit annual EPS growth over the medium term. RBC also estimated that Costco could pay a special dividend of approximately $23 per share within the next one to two years.

Valuation a Key Hurdle

Despite the positive outlook on the business fundamentals, RBC's neutral rating is rooted in the stock's rich valuation. The analyst noted that Costco shares trade at approximately 37 times the firm's fiscal 2028 EPS estimate of $25.00.

This multiple represents a significant premium, standing at 1.9 times the S&P 500's valuation. Given this, Shemesh stated he "struggles with the path to significant upside" from current levels, making a Sector Perform rating the most appropriate stance for now.