Why Costco Stock May Struggle Even as Its Business Thrives

Now that Walmart Corp (NYSE: WMT) has reported a blowout quarter, investors’ eyes are turning to Costco Wholesale Club Inc. (NASDAQ: COST) to see if it can break out of its year-long funk. Costco’s earnings aren’t scheduled until Dec.11, but the company does offer monthly sales reports that could hint at the stock’s next move.

COST shares are down 10% over the last three months, erasing all of the company’s year-to-date (YTD) gains and putting the stock near crucial technical levels. Is it finally time to buy, or is there more downside ahead?

Reasons for Optimism: Strong Earnings and Customer Loyalty

Costco’s brand loyalty is unmatched, driven by its renowned Kirkland Signature brand and reputation for high employee satisfaction. Plus, who can resist the $1.50 hot dog/soda combo? But besides its customer appeal, investors have plenty of reasons to like the stock:

• Digital Commerce Growth: Building an online footprint has been a challenge for Costco, but its digital initiatives are finally yielding results in the data. After a slowdown to 13.6% digital comp sales in Q3, September sales rebounded with 26.1% comps, followed by 16.6% in October. If this trend continues, e-commerce could become a more meaningful growth lever.
• Impressive Same-Store Sales Numbers: Costco earnings reports are usually Must-See TV for market watchers, and the company has a history of beating even the most optimistic projections. In the fiscal year Q4 2025 report released on September 25, Costco reported earnings per share (EPS) of $5.87 and record revenue of $86 billion, both of which topped expectations. However, it was the 5.7% comp sales number that stole the show, with 8.6% comps from international stores.
• Successful Membership Fee Increase: In September 2024, Costco raised its annual membership prices—$5 for Gold Star members and $10 for Executive members. Despite the hike, the drop-off in memberships was minimal—Costco reported 89.8% global renewal rates in its Q4 earnings, including a 92.4% retention rate in the U.S. and Canada. Crucially, membership income grew by 14%, more than double the Q4 2024 figure.

Reasons for Pessimism: Valuation and Potential Consumer Slowdown

Cult status can only take you so far, and Costco’s valuation has reached excessive levels, leaving little room for error: 

• Valuation Still at Nosebleed Levels: Value-conscious investors might question paying tech-sector multiples for a low-margin club wholesaler. Despite being in the red for the year, COST stock still trades at 49 times forward earnings and 14 times book value, which is similar to the 65 forward P/E ratio you’re getting from NVIDIA Corp. (NASDAQ: NVDA). Of course, there’s one key difference: NVIDIA is pulling in 70% gross margins, compared to 11% at COST. For a retailer to support this valuation, it needs to wow the market every quarter without making any missteps. 
• Merchandise Margins Under Pressure: Costco operates its merchandise with slim margins, seeking to offset lost revenue through membership sales. With an operating margin of less than 4%, any disruption could have an immediate impact on the company’s bottom line. With rising inflation and unpredictable tariff policies, Costco’s razor-thin margins could become an issue, especially at this valuation.
• Economic Weakness Could Slow Growth: A company trading at 50 times earnings needs the good times to keep rolling, and many public-facing firms like McDonald’s Corp. (NYSE: MCD) and PepsiCo Inc. (NASDAQ: PEP) have mentioned deteriorating spending amongst lower-income consumers in their Q3 earnings reports. While Costco’s client base skews affluent, the stock's valuation premium means any weakness will be punished. If the consumer slowdown spreads to higher-income households, the company might struggle to meet the lofty expectations for Q1 2026 earnings.

Technical Trends Point to More Short-Term Volatility

If you’re hoping Costco is going to make a last-second rebound in 2025, you might want to look away from the page now. COST shares have been trending downward slowly since June, and the decline has accelerated in recent weeks, despite successive earnings beats. Since the 50-day simple moving average (SMA) dipped below its 200-day counterpart, the 50-day has capped any rebound attempt with durable resistance.

Despite the prolonged downtrend, the Relative Strength Index (RSI) hasn’t fallen below the Oversold threshold of 30, indicating there could be more downside ahead. The steady decline has formed a wedge pattern highlighted by sequentially lower highs and a return to the 2025 low. 

On-balance volume (OBV) is an indicator often used to track institutional buying and selling. If the line trends down, it means the pressure is coming from sellers, which is frequently a sign that large institutions have exited or are in the process of leaving.

COST shares face plenty of technical headwinds right now, making it hard to recommend adding to positions here. The company’s long-term business is still a winner, but the stock is likely more than a good earnings report away from reversing this downtrend.

Where Should You Invest $1,000 Right Now?

Before you make your next trade, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis.

Our team has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and none of the big name stocks were on the list.

They believe these five stocks are the five best companies for investors to buy now...

See The Five Stocks Here

The article "Why Costco Stock May Struggle Even as Its Business Thrives" first appeared on MarketBeat.