Why Costco’s Rally May Continue Into 2025

Key Points

• Costco's stock price can rally higher in 2025 because of industry-leading growth, the growth outlook, cash flow, and capital returns.
• The company is net cash and on track to pay a special dividend in early 2026.
• Analysts are raising targets after the FQ1 release and point to the $1100 range for this stock. 

Highly valued or not, Costco NASDAQ: COST can continue to rally in 2025. The stock is pricey, trading at 55x its current year earnings estimate. Still, it factored in the growing cash balance, the likelihood of special dividends, and the robust growth outlook. The analysts forecast earnings will more than double over the next decade, putting this stock in a more reasonable valuation relative to the long-term outlook. Assuming the analysts are right, Costco trades at less than 25x its forward earnings outlook, and the trends suggest they’re being cautious. Highlights from 2024 include market share gains, industry-leading growth, and outperformance tied to volume. 

Regarding the outlook for special dividends, Costco is a cash flow powerhouse generating ample free cash flow to sustain operations, pay a regular dividend, offset share-based compensation with buybacks, and build its cash balance quarterly. The critical detail from FQ1 2025 is that the cash balance increased by 10% YTD and is nearly $11 billion. 

With an $11 billion cash balance, the company has net cash relative to debt and has enough to pay a sizeable special dividend in 2025. The company has paid several special dividends over the past decade, so there is a precedent. The most intriguing detail is that the special dividend is trending higher, and Costco will soon have the funds to continue that trend. Based on the Q1 2025 figures, that may be as early as the first half of fiscal 2026. 

Costco Has Solid Quarter, Outlook Bright

Costco had a solid quarter in FQ1, producing $62.15 billion in net revenue, a gain of 7.5% compared to last year. The figure is underpinned by a 7.75% increase in membership fees and systemwide 7.1% comp store growth. Revenue outpaced MarketBeat’s reported consensus by 240 basis points, driving a strong margin and bottom-line results. Segmentally, the United States was strongest, with a 7.2% comp, followed by 7.1% internationally and 6.7% in Canada. 

Margin is another area of strength. The company widened its margin and delivered leverage gains on the bottom line. Operating income grew by 10.6%, outpacing revenue growth by 310 basis points, and net income gains were stronger. Net income grew by 13.15%, driving $3.82 in adjusted earnings, $0.03 better than consensus forecasts, and strength is expected to persist in 2025. 

Costco didn’t provide guidance, but the trends are positive, and the outlook is bright. Analysts forecast revenue will grow sequentially in FQ2 and sustain the 7% YoY growth rate. Earnings are expected to grow slightly faster and generate sufficient free cash flow to sustain capital return trends. 

Analysts Lift Targets for Costco and See It Trading Above $1000

Some analysts lifted their price targets for Costco stock after the Q1 release. MarketBeat tracks nearly a dozen revisions issued on the release day, and 100% include a price target increase. Most revisions put the stock above $1000, many of which are in the $1,100 to $1,175 range, implying a bull-case scenario of 10% to 17.5% upside from the pre-release closing stock price. A move to this level would put the market well into new, all-time high territory at levels where many expect the company to split the stock. The stock price is inaccessible for many market participants at these levels; the company might split by as much as 10-for-one to bring the price down into the $100 range. 

Costco’s stock price struggled with traction following the release, but the uptrend remains intact. The market may consolidate or pull back from current levels before moving higher, but higher prices will likely occur over the next two to three quarters. The critical support is near $900, about 10% below the current action, and critical resistance is near the current levels, just below $1000.