After Posting Another Solid Earnings Beat, Is Costco's Stock Due for a Rally?

Costco Wholesale (COST -0.78%) has been a growth machine for investors over the years. Its bargain-hunting experience and the value it offers to consumers who are willing and able to buy in bulk have made its warehouse stores extremely popular. And even after many years of success, the discount retailer still has plenty of potential to expand into more markets, as its warehouses are highly concentrated in North America. Recently, the company delivered yet another solid quarterly report. But despite this, the stock's performance for the year has been lackluster. Could it be overdue for a big rally? Image source: Getty Images. Costco's financials remain resilient Costco posted its fiscal 2025 fourth-quarter earnings numbers after the closing bell on Thursday. For the period, which ended Aug. 31, revenue totaled $86.2 billion -- just ahead of the $86.1 billion that analysts were expecting. On the bottom line, its earnings per share of $5.87 topped Wall Street estimates of $5.80. One key metric that investors also focus on for retailers is comparable sales growth, which shows how much growth existing stores generated when compared to the same period a year ago. It effectively is an organic growth rate as it excludes the impact of newly opened stores and doesn't factor in recently closed stores. Costco's comparable growth rate in fiscal Q4 was 5.7%. And what's particularly encouraging is that it has been experiencing its strongest organic growth outside its home market: The growth rate in the U.S. was 5.1%, while international growth came in at 8.6%. Although the company did not provide guidance for the new fiscal year, it did say that it was working on offering more products under its private-label Kirkland Signature brand in an effort to give customers alternatives to "tariff-impacted goods." This suggests it's adapting to the current macroeconomic conditions as best as it can. Why were Costco's results not enough to give the stock a boost? Despite the earnings beat and favorable financial results, shares of Costco fell by a few percentage points on Friday. As of the end of the week, the stock was flat for the year. That's a stark contrast to the S&P 500 index, which is up 13% so far in 2025. It was a different story last year, when Costco's stock soared by 39%, outperforming the broad index's 23% gain. Costco's underwhelming stock performance this year likely has more to do with its already inflated valuation. After an extraordinary year in 2024, it's now trading at a price-to-earnings (P/E) multiple of over 50. By comparison, the average S&P 500 stock trades at a P/E of 25. Costco's stock is extremely expensive in light of its modest growth rate. While the business is doing well, a lot of its expected future growth is effectively priced into the stock, so unless the company completely dominates and outperforms expectations, it may not get much of a boost from posting strong results. The stock's high valuation makes it hard to justify investing in Costco today Investors are growing more concerned about high valuations, especially with tariffs impacting the prices of more and more consumer goods. The fear on Wall Street is that as consumers start to feel the effects of higher prices, growth rates may slow down. Considering that Costco stock trades at an extremely high valuation, it has no margin of safety. That leaves expectations incredibly high, and there's plenty of room for the share price to fall should economic conditions worsen. While it could still be a good long-term buy, at its current valuation, I'd pass on Costco's stock. There are many more reasonably priced growth stocks to choose from.