Is Costco’s (COST) Moat Really Worth the Premium?

Costco Wholesale Corporation (NASDAQ:COST) has built something most retailers would love to have: customers who pay just to shop there. The company ended fiscal 2026 with 84.1 million paid members, while its U.S. and Canada renewal rate reached 92.3%. That kind of loyalty is a big reason Costco has been able to keep growing even as consumers become more selective about where they spend.

But Costco’s moat is not just the membership model. It is the way several advantages reinforce each other.

Costco keeps merchandise margins low, sells a relatively curated selection of products, and uses its colossal scale to negotiate with suppliers. That allows it to offer prices that members perceive as attractive, which gives them a reason to renew and shop more frequently. More members and higher spending then give Costco even more purchasing power.

Kirkland Signature adds another layer. Costco’s private-label brand lets the company offer products at a discount to national brands while maintaining control over quality and pricing. Management said Kirkland products typically offer savings of 15% to 20% compared with national brands.

The model is working. Costco’s net sales rose 11.2% in the fourth quarter, while comparable sales increased 6.7% excluding gasoline and foreign exchange. Traffic was up 3.3%, and the average transaction was up 3.3% on the same basis. Membership income also increased 7.7% excluding foreign exchange.

The important point, however, is that Costco is not growing at some extraordinary rate. A 6% to 7% underlying comparable-sales growth rate is very good for a company of this size, but it is not hypergrowth.

That matters because the stock trades at 40.32x forward earnings.

Costco ranks second on our list of 10 Best Stocks to Buy According to Billionaire Richard Chilton. To see which stocks outranked it, click HERE.

Costco’s moat is getting wider

One reason I would not dismiss Costco’s valuation completely is that the company is still finding ways to increase the value of the membership.

Its ancillary businesses, including gas, pharmacy, and travel, grew faster than the overall business. Digitally enabled sales exceeded $33 billion and increased more than 20%. Costco is also expanding delivery through Uber Eats and DoorDash, while digital traffic and personalization continue to improve.

The younger customer base is particularly interesting. Members under 40 now account for more than a quarter of the membership base, and that group has grown nearly 60% since COVID. Younger members initially spend less, but management said spending tends to rise as they get older, earn more, and have larger households.

Then there is the warehouse itself. Costco’s physical stores are not simply places to buy groceries. They combine food, gasoline, pharmacy, travel, and a constantly changing selection of products that creates the company’s famous “treasure hunt” experience. That is difficult for an online competitor to reproduce.

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But a great moat does not make every price attractive

This is where I think investors need to be careful.

Costco Wholesale Corporation’s membership growth has been slowing for eight consecutive quarters. Total paid memberships increased only 3.8% year-over-year in the latest quarter. Management expects that growth rate to remain closer to recent levels, although higher spending per member and new international warehouses can provide additional growth.

The company plans to open 30 net new warehouses a year over the long term, which gives it another growth lever. But again, this is not a business suddenly accelerating into 20% growth.

At 40.32x forward earnings, investors are paying a substantial premium for Costco’s consistency, loyalty and ability to compound over time. That can work. Costco has repeatedly shown that its customers will keep spending when they believe they are getting better value.

But the valuation also means that many years of continued execution are already reflected in the stock.

Conclusion

Costco has one of the strongest moats in retail because its advantages work together. Membership loyalty drives scale, scale supports lower prices, and lower prices reinforce loyalty. The problem is not the business. It is how much investors are paying for it.

At 40.32x forward earnings, Costco does not need to fail for the stock to disappoint. It simply needs growth to settle closer to its current mid-single-digit underlying rate for longer than investors expect. That makes Costco a great business, but not an obviously cheap stock. For Buffett-style long-term investors, though, patience could pay off as Costco’s moat currently seems relatively impenetrable.

Market Sentiment

Hedge fund sentiment toward Costco was largely stable in the second quarter. According to Insider Monkey’s database, 104 hedge funds held the stock in Q2, down slightly from 107 in Q1. However, the value of those positions increased from about $10.40 billion to $11.59 billion. The modest decline in fund count alongside higher capital invested suggests institutional investors remained broadly constructive on Costco despite its premium valuation.

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This article is originally published at Insider Monkey.