Costco Wholesale Corporation (COST): A Bull Case Theory

We came across a bullish thesis on Costco Wholesale Corporation on Investing with Common Sense’s Substack. In this article, we will summarize the bulls’ thesis on COST. Costco Wholesale Corporation's share was trading at $970.28 as of January 27th. COST’s trailing and forward P/E were 51.97 and 47.85 respectively according to Yahoo Finance.

Costco Wholesale Corporation, together with its subsidiaries, engages in the operation of membership warehouses in the United States and internationally. COST’s financial strength is anchored in an exceptionally resilient balance sheet and a business model that converts accounting profits into real cash at a remarkable rate. Despite carrying roughly $10 billion in total liabilities when including bonds and lease obligations, the company holds over $15 billion in cash and short-term investments, resulting in a net cash position of more than $5 billion.

Its debt is largely composed of long-dated senior notes issued at historically low interest rates, while lease liabilities are operational in nature and fully supported by store-level cash generation. This structure not only removes solvency risk but actually creates positive interest arbitrage, as Costco earns substantially more on its cash reserves than it pays on its debt.

Operationally, Costco’s cash flow generation is the core of the thesis. In fiscal 2025, operating cash flow exceeded net income by over $5 billion, driven by non-cash charges, stock-based compensation, and structurally favorable working capital dynamics. After reinvesting aggressively in new warehouses and infrastructure, the company still generated nearly $8 billion in free cash flow, a figure that has compounded at close to 10% annually. Management has consistently deployed this cash with discipline, prioritizing growth CAPEX, a steadily rising regular dividend, opportunistic special dividends, and selective share repurchases.

The primary risks are not financial but philosophical and valuation-driven. Costco trades at demanding multiples that leave little margin for error, and any growth disappointment could trigger sharp multiple compression. More subtly, the model depends on maintaining massive volume, cultural discipline, and member trust. The greatest long-term threat would be a deviation from its deeply ingrained values around pricing, employee investment, and partner-first economics.

Reassuringly, leadership incentives and board composition remain tightly aligned with long-term stewardship rather than short-term optimization. While the stock is expensive today, Costco remains a rare, structurally advantaged compounder best approached with patience, awaiting more favorable entry points rather than questioning the quality of the underlying business.

Previously, we covered a bullish thesis on Costco Wholesale Corporation (COST) by FluentInQuality in March 2025, which highlighted the company’s membership-driven recurring revenue model, operational efficiency, and volume-led growth through bulk retail and strategic loss leaders. COST’s stock price has depreciated by approximately 7.31% since our coverage due to macro uncertainties. Investing with Common Sense shares a similar view but emphasizes balance sheet strength, cash flow generation, and disciplined capital allocation.

Costco Wholesale Corporation is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 88 hedge fund portfolios held COST at the end of the third quarter which was 91 in the previous quarter. While we acknowledge the risk and potential of COST as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than COST and that has 10,000% upside potential, check out our report about this cheapest AI stock.

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Disclosure: None.