Costco crushes Q3, stock at all-time high: Is it a buy?

Costco Wholesale Corporation (NASDAQ:COST) reported its Q3 results on May 30th, surpassing expectations and marking its fourth consecutive profit beat. The company achieved a GAAP EPS of $3.78, beating estimates by $0.10, and reported revenue of $58.52 billion, which exceeded expectations by $520 million.

Net sales increased by 9.1% year-over-year, reaching $57.39 billion. This growth was partly due to the positive impact of approximately 0.5 to 1.0 percent from the fiscal calendar shift resulting from the fifty-third week last year. Comparable sales rose impressively across all regions: U.S. sales increased by 6.2%, Canadian sales by 7.7%, and international sales by 7.7%.

E-commerce was a standout performer, with online sales soaring by 20.7%. This strong digital growth contributed significantly to the overall sales increase. Membership fees also grew, reaching $1.12 billion compared to $1.04 billion the previous year, reflecting Costco’s expanding member base.

Costco operates 878 warehouses worldwide, with 605 located in the U.S. and Puerto Rico. The company also runs e-commerce sites in multiple countries, enhancing its global reach. This extensive footprint continues to support its robust sales performance and provides a platform for future growth.

Despite its high valuation, Costco continues to attract positive analyst ratings due to its consistent performance and growth prospects. According to analysts, the company benefits from owning most of its properties, which reduces overhead costs and provides financial stability. This ownership model is a significant advantage over competitors who lease their spaces.

Analysts highlight Costco’s efficiency in turning reinvestments into shareholder gains, with strong returns on invested capital (ROIC) and return on assets (ROA). These metrics indicate the company’s ability to generate substantial free cash flow, which is expected to grow even further as the business expands.

Valuation remains a concern for some investors, with the stock trading at a high multiple. However, Costco’s consistent earnings growth and robust business fundamentals make it a compelling investment for the long term. Analysts suggest that while the stock may appear expensive, its growth potential justifies the current valuation.

With Costco stock reaching an all-time high, it’s essential to consider not just the fundamentals but also the technical aspects of its stock price movement. Let’s delve into the charts to see if the current price action aligns with these optimistic prospects and to identify potential entry points for investors.

Shares of Costco nearly doubled in the one-year period between March 2021 and March 2022. Following this impressive run, they entered a downtrend and formed a descending triangle pattern on the daily chart, signaling weakness. However, in May of last year, they broke out from this descending triangle pattern and have experienced a strong uptrend since November 2023.

COST chart by TradingView
Despite the stock being firmly in the control of bulls, it is currently trading down by 1.71% following the release of Q3 results. For bullish investors, this presents an ideal buying opportunity to initiate a long position under $800, with a stop loss at near-term support around $696. If the stock continues its upward trajectory, it could break the coveted $1,000 mark in the coming months.

Conversely, bearish investors must exercise caution. Despite today’s decline, the stock is experiencing strong bullish momentum and could bounce back. However, if it starts trading below $788, this would indicate short-term weakness, making it a potential entry point for shorts, with a stop loss near its recent swing high at $820. If the downtrend continues, the initial support level to watch is around $696, where profits could be booked.

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