1 Nasdaq-100 Subscription-Based Business That Could Succeed Under the New Tariff Environment (Hint: I'm Not Talking About Netflix)

The capital markets have been in turmoil since U.S. President Donald Trump announced his sweeping new tariff policies on April 2, declaring it "Liberation Day." Among some of the hardest-hit stocks over the last week are technology businesses -- many of which are now vulnerable to new tariffs.

Since April 2, the tech-heavy Nasdaq-100 index has dropped by 11% as of this writing (April 8).

While many of the companies in the Nasdaq-100 are heavy hitters in the tech landscape, the index does include major players in other industries too.

One Nasdaq-100 stock that's captured my interest right now is Costco (NASDAQ: COST). Let's explore why Costco might actually be a smart opportunity right now as concerns over Trump's tariffs linger.

Costco's financial profile is interesting

Most brick-and-mortar stores make money the same way. Retailers such as Target, Walmart, Kroger, and discount outlets like TJX offer shoppers a variety of consumer goods, groceries, apparel, and even furniture for a reasonable price.

Costco does all this as well. However, there are a couple of unique aspects of its underlying business that separate it from most other retailers. A good way to understand Costco's entire business is to look at its financials.

Data source: Investor Relations.

During the most recent quarter, Costco generated $63.7 billion in total revenue -- 98% of which came from selling goods right from the store (just like any other retailer). But as the financial profile above shows, Costco also had $61.4 billion in operating expenses last quarter. Clearly, the company isn't generating much of a return on its merchandise sales. While Costco's inventory spans groceries, consumer electronics, furniture, clothing, home remedies, and more, the company's margin profile on the sale of these goods is quite thin.

However, in addition to general merchandise sales, Costco also made $1.2 billion from subscription fees. These are recurring fees that Costco makes from people becoming members of its stores. These membership cards separate Costco from the likes of Walmart, Target, and many other retailers.

Below, we'll explore why these membership fees should help Costco as tariff concerns continue to rise.

Image source: Getty Images.

Why Costco's business should be fine, despite looming tariffs

Subscription models carry high profit margins. While pricing in Costco's inventory is likely going to change under any new tariff policies (more on that below), the company's highly profitable subscription membership model should remain in good shape.

In essence, the membership fees should help offset any headwinds the company could face as it pertains to a higher cost structure or more sensitive consumer shopping patterns as tariffs go into effect. With all that said, I actually think Costco's merchandise costs may not be affected as much as investors are assuming.

During the company's last earnings call in early March, CEO Ron Vachris told investors that "it is difficult to predict the impact of tariffs, but our team remains agile and our goal will be to minimize the impact of related cost increases to our members. About a third of our sales in the U.S. are imported from other countries, and less than half of those are items coming from China, Mexico, and Canada."

These comments from Vachris should provide some sense of comfort for investors. While he's admitting that Costco is exposed to the tariffs on some level, most of the goods the business imports are from countries that are less targeted by the new administration.

Furthermore, given the benefits of Costco's buy-in-bulk model attached to competitive prices compared to other retailers, I am cautiously optimistic that the company could actually witness a rise in foot traffic and membership volume as long as tariffs ripple through the retail economy.

In other words, I tend to think retailers such as Target and traditional grocery chains are more vulnerable under this tariff environment. Cost-conscious consumers may begin to flock to Costco as an alternative. After all, the company's wide selection of inventory rivals the competition, and the benefit of becoming a member (subscriber) could make sense in this economy -- especially for families or small business owners.

Is Costco stock a good buy right now?

With a forward price-to-earnings (P/E) ratio of 50, I can't say that Costco is necessarily a cheap stock. To put this into perspective, the average forward P/E across the S&P 500 is about 20.

COST PE Ratio (Forward) data by YCharts.

With that said, the graph above illustrates a pretty interesting trend. Costco's forward P/E was nearly 60 earlier this year, as the stock briefly reached an all-time high. But just two months later, there's been an extreme normalization in the company's valuation given the precipitous sell-off over the last couple of weeks.

Despite some near-term uncertainty, I think Costco is prepared to navigate around the tariffs with minimal damage. Moreover, tariffs shouldn't be much of a direct headwind for the high-margin subscription side of the business. Given these dynamics, I see Costco as uniquely positioned right now. I think this is an opportunity to buy the dip in Costco stock with the intention to hold on for the long term.

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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, TJX Companies, Target, and Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.