Prediction: Costco Will Be Worth More Than Wall Street Analysts Expect in 10 Years

Key Points

• The warehouse giant has delivered strong earnings growth and stock performance over time.

• One of its strengths is that it makes money before customers even enter the warehouse to shop.

• 10 stocks we like better than Costco Wholesale ›

Costco Wholesale (NASDAQ: COST) is a name you probably know. If you make trips to the warehouse yourself for groceries, gas, or other purchases, you likely do so because Costco offers a wide variety of products at dirt cheap prices. All of this has equaled success for the company from an earnings and stock performance perspective over time.

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Wall Street generally has been bullish on Costco, and recommendations to buy or hold well outnumber advice to sell or avoid the stock. In a fast-moving world, though, you may wonder whether this market giant will continue along its current path in the coming years or weaken amid challenges such as tariffs or competition -- and how this may impact the stock's value.

My prediction is Costco can handle the challenges and will be worth more than Wall Street analysts expect in 10 years. Here's why I'm confident.

Image source: Getty Images.

A worldwide business

Before looking forward, it's important to look around and get a clear picture of the Costco business. The company operates 914 warehouses, and though more than 600 of those are in the U.S., the business is well established worldwide with a presence in countries from China to France and New Zealand. Costco also offers customers the opportunity to buy products across e-commerce sites in several countries.

Costco's secret to success is it doesn't depend on the sales of products for growth, but instead on something that may be much more reliable: customer memberships. You can't shop at Costco without one, and that means you're paying Costco before you even grab a cart.

Memberships are high margin for Costco as it doesn't cost much for the company to offer you a card. So the $65 a year you pay for a standard membership or the $130 you pay for an executive level membership significantly contributes to Costco's profit. In the latest fiscal year, the company reported $8 billion in net income -- and more than $5 billion in membership fee revenue.

Returning members

This allows Costco to offer products at low prices, and the fact that Costco buys those products in bulk supports that effort as it pays less when it buys a great number of items. Meanwhile, the opportunity to get in on many products, as well as gas for your car, keeps people renewing their membership over the long term. We can see this in renewal rates that consistently top 90% in the U.S. and Canada.

This business model is one that has worked for Costco like a well-oiled machine year after year, allowing the company to steadily grow earnings, and investors have pushed the stock price up.

COST data by YCharts

Why do I think this will continue? Costco, with its vast network of suppliers and strong private label, Kirkland Signature, has the structure in place to handle potential import tariff headwinds. In fact, the company, in a proactive move, is looking to refocus more Kirkland sourcing to the country where the products will be sold to avoid import tariffs.

The company's rock-bottom pricing is advantageous for customers, but during times of economic turmoil -- from a single headwind like import tariffs to a broad market downturn -- this could be the element that powers Costco's revenue while other retailers suffer. This makes Costco a company that's well positioned to excel during any market environment.

A famous $1.50 hot dog

Meanwhile, Costco's focus on maintaining deals that customers like -- such as its $1.50 hot dog -- and the company's new moves to improve the shopping experience, such as set-aside shopping hours for executive members, also should support revenue growth over time.

It's true that Costco stock isn't cheap, trading for 45 times forward earnings estimates, though it has come down from a high of more than 56.

But, considering Costco's business model and the loyalty of its membership base, it's worth this premium.

In the past and currently, Wall Street analysts have been optimistic about Costco's prospects, but they've been known to underestimate. For example, Costco surpassed earnings estimates in three of the past four quarters, with one of the beats happening in the most recent period. Some analyst predictions call for Costco stock to surpass $3,190 per share by 2035, which represents a 248% gain from today's stock price and would push the stock's market cap to more than $1.4 trillion.

Costco stock has climbed more than 500% over the past decade. Considering this and its ongoing earnings strength, I predict the stock will exceed that $3,190 level -- particularly if Costco continues to deliver positive earnings surprises. It's very possible that Wall Street may be underestimating Costco's earnings and stock performance potential over time, and all of this reinforces my prediction that Costco will be worth more than analysts think a decade from now.

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.