Costco (NASDAQ:) primarily engages in the management of membership warehouses.

The company currently operates 817 warehouses, 565 of which are located in the United States and Puerto Rico, while Costco also operates e-commerce sites in the U.S., Canada, the United Kingdom, Mexico, Korea, Taiwan, Japan, and Australia.

Costco is different from traditional retailers because of its membership offer, which results in consistent cash flows.

Costco’s ability to sell products at great discounts, which increases customer retention and allows for unprecedented economies of scale, is why it stands out.

The company’s incredible success has resulted in extraordinary shareholder returns. But, at the same time, shares trade at a premium.

Costco’s distinctive qualities are admirable, but there is likely to be limited upside at the current valuation level. This is why I remain neutral on this stock. (See COST stock charts on TipRanks)

Neverending Growth

Costco recently posted its Q4 and full-year FY2021 results, marking another year of robust growth.

During the quarter, revenues increased 17.5% to $61.4 billion, from $52.3 billion last year. For the fiscal year, revenues grew 17.7% to $192.1 billion versus the previous year.

Consequently, net income for the year also grew to $5 billion (EPS of $11.27), compared to $4 billion (EPS of $9.02) in FY2020.

From total sales, $3.9billion was attributed to member fee income. Today, the company has 61.7million households or 111.6million cardholders. It also achieved a 91.3% renewal rates in Canada and the U.S.

Its margins have been growing as the company expands. Costco was able to maintain its gross margins of double digits despite industry margins that were razor thin. The company’s gross margins grew from 11.1% up to 11.2% over the past year.

Stock Is Not Cheap

Costco’s growth has shown no signs of slowing down over the past few years, with the company’s international expansion performing better than expected, especially in Asia.

Profitability should continue to rise as the company achieves operational efficiency and better margins. Costco investors continue to have high expectations.

The forward PE of Costco is 37.1. Analysts expect FY2022 earnings to be around $12.05. This premium is significant for the sector. Target (NYSE:) and Walmart (NYSE:), for context, trade with forward P/Es of 18 and 22.3, respectively.

One, Costco has executed well over the years, so EPS should grow to the current multiple. There is not much upside to further valuation growth.

In fact, potential headwinds may easily cause a valuation multiple compression. This has reduced investors’ safety margin.

Wall Street’s Take

Turning to Wall Street, Costco has a Strong Buy consensus rating, based on 13 Buys, six Holds, and zero Sells assigned in the past three months. At $481, the average COST price target implies 7.5% upside potential.

Disclosure: Nikolaos Sismanis had no position at the time this article was published.

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