Costco Wholesale Corp. (NASDAQ:COST) and Apple Inc. (AAPL) – What Sets Them Apart

Large Caps 9 replies 0 votes 1814 views Tags:  business growthCustomer LoyaltyLong-Term InvestmentsMembership StrategiesPremium ValuationsRetail Giants
Amy Swift 10 months

In the world of investing, some companies have a knack for consistently winning the hearts of their customers and shareholders alike. Two such examples are Costco Wholesale Corp. (COST) and Apple Inc. (AAPL), which share a common characteristic: unwavering support from their loyal members and long-term shareholders. In this article, I'll dive into the reasons behind their remarkable success and examine whether COST's premium valuation is justified.

Costco's Success Story

Thanks to attractive pricing in an environment of rising interest rates, COST witnessed a surge in membership renewals both domestically and internationally, reaching all-time highs.

As of now, COST has reported impressive year-over-year growth in its first 52 weeks of FY2023 sales, reaching $232.95 billion, primarily driven by a robust performance in the Canada segment (+8% YoY) and the international segment (+7.9% YoY).

While we await further financial details until the upcoming earnings call in September 2023, it's evident that the company is on track for another stellar performance. Operating margins in the Canada and international segments have been noteworthy, outpacing the U.S. and overall company averages.

COST's membership fee strategy, a well-known driver of its success, has continued to pay dividends. Membership revenues have grown substantially in the first three quarters of FY2023, directly contributing to its profitability.

This steady support from both members and long-term shareholders has allowed COST to thrive, even in a fluctuating interest rate environment.

Drawing Parallels with Apple

COST's resilience in the face of economic uncertainties reminds us of Apple's impressive performance. Apple, too, has defied recessionary fears, boasting an all-time high installed base across all geographic segments.

Notably, the iPhone 14 Pro Max, priced at $1,099, became a massive hit, comprising 35% of overall sales during its September 2022 launch. Despite the price hike for the iPhone 15 Pro Max to $1,299 (+18.1%), Apple's strong branding and loyal fan base are expected to sustain its growth.

Both COST and AAPL have chosen to outsource much of their manufacturing to lower-cost regions, reducing production expenses. COST has passed on these savings to consumers through its membership fee strategy while aggressively expanding its global footprint.

By August 2023, COST had grown its presence to 861 global warehouses, attracting a growing base of loyal members. AAPL, on the other hand, has utilized its strong free cash flow to retire shares, reinforcing investor confidence.

Valuations and Outlook

Both COST and AAPL trade at premium valuations compared to their respective sectors. While some may question the sustainability of these high valuations, the market continues to reward them.

Looking at their projected growth rates, COST's and AAPL's deceleration in growth rates still outpaces their sector peers. Although they may not replicate their previous growth rates, both companies appear poised for continued success.

COST's membership fee strategy, expanding global presence, and strong balance sheet suggest that the stock may remain at a premium. The prospect of an eventual membership fee hike adds to the optimism.

So, Is COST Stock a Buy, Sell, or Hold?

Considering COST's consistent outperformance over the past three and ten years, there's a strong case for holding the stock. However, as past performance doesn't guarantee future results, investors must weigh the premium valuations against the potential for further growth.

While COST's valuations have steadily climbed, there may be a limit to this ascent. Whether its valuations can double as they have in the past is uncertain. With current valuations and consensus earnings projections, the upside potential appears somewhat limited.

Therefore, I rate COST as a Hold (Neutral) at this point. For those interested, waiting for potential pullbacks could offer a better margin of safety. Ultimately, the decision to invest in COST depends on individual circumstances and investment styles.

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