Why Costco’s (COST) Membership Model Faces a Valuation Reckoning

Since their all-time highs of ~$1,000 in February—following a triple-digit rally over the past couple of years—Costco (COST) stock has fallen by ~6% in 2025. At first glance, this correction may look like nothing more than a technical adjustment in a high-quality compounder. In practice, however, it may mark something more meaningful: the point at which the market began to question how far it is willing to pay tech-growth multiples for a mature retailer—even one that is exceptionally well executed.

The trigger has not been a classic operational deterioration—quite the opposite. Comparable sales continue to grow, traffic remains strong, and membership income remains robust. The issue is subtler and therefore more problematic for the stock’s valuation. Small cracks are starting to appear in what has long been treated as the most “risk-free” pillar of Costco’s thesis: the stability of its membership renewal rates.

Given how heavily the investment case is anchored to this driver, even tiny basis-point moves are enough to justify a deeper re-rating. With management signaling the possibility of further pressure ahead, I find it hard to see Costco meaningfully outperforming in the near term, which leaves me cautiously bearish for now—until proven otherwise.

Enough is Enough for Costco’s Valuation

It seems that 2025 was the year the market’s patience with Costco finally ran out. Paying tech-growth multiples for a business that has grown revenues at a 6.7% CAGR over the past three years—and operating income at roughly 10% more recently—simply stopped making sense.

To briefly contextualize, the bull case around Costco rests on an extremely predictable recurring-revenue model, anchored in membership fees with renewal rates structurally above 90%, which effectively finance most of the company’s profits.

On top of that, Costco’s value proposition is almost unbeatable for consumers, based on consistently lower prices, high inventory turnover, and a policy of deliberately compressed margins designed to maximize traffic and loyalty. By executing a high-volume, low-margin strategy arguably better than that of any other retailer in the world, Costco has justified much of its premium valuation by its exceptionally low probability of underperforming.

The problem is that this narrative eventually went too far. Under the assumption that Costco’s “magic formula”—monetizing massive retail volume through membership fees—would justify upside indefinitely, the stock’s earnings multiple stretched to 63x at the beginning of 2025, well above both its historical average and the industry average of just 15.9x. In my view, that valuation was largely anchored to the perceived immutability of membership renewal rates, and over the course of 2025, even a rare bout of instability in this metric proved enough to trigger a meaningful re-rating lower.

Costco’s Membership Engine Faces Its First Signs of Stress

To put things into perspective, over the last twelve months, Costco generated $280.4 billion in revenue while operating with a net income margin of 2.9%, which translates into roughly $8.3 billion in net income.

Costco does not explicitly disclose the margin on membership fees, but assuming those margins are very high—if not close to full, given the minimal costs associated with maintaining the program—using a ~90% margin on the $5.5 billion in membership fee revenue generated over the past twelve months implies that memberships account for ~57% of total net income. In other words, nearly 60% of Costco’s profits are effectively “risk-free,” as long as renewal rates remain structurally above 90%. That is massive for a retailer of Costco’s size.

Viewed through this lens, it is reasonable to argue that the main risk to the thesis is either weakness in membership fee growth or, more critically, any sign of declining renewal rates. And unfortunately, it is the latter that has shown up in recent quarters.

In Q3 FY2025, Costco’s renewal rates stood at 92.7% in the U.S./Canada and 90.2% worldwide. In the following quarter, those rates slipped to 92.3% and 89.8%, respectively. More recently, in Q1 FY2026, renewal rates edged down again to 92.2% in the U.S./Canada and 89.7% worldwide. In short, from Q3 FY2025 to Q1 FY2026, renewal rates deteriorated by roughly 50 basis points in both geographies.

At least there has been no weakness in membership fee growth. In fiscal 2025, Costco delivered 10% year-over-year growth in membership fee revenue, and in Q1 FY2026 alone, that figure accelerated to 14% YoY. This clearly shows that the recurring revenue engine is still firing on all cylinders. That said, the first signs of erosion in the quality of that engine—renewal rates—are now visible. Notably, Costco itself has attributed this softness to the mix shift toward new digital members and promotional sign-ups, which tend to renew at slightly lower rates.

Where Costco’s Valuation Finds Its Floor

That said, for a defensive-oriented retail stock that was trading at 63x earnings at the beginning of the year, even the slightest warning signs in its recurring revenue engine were bound to trigger multiple compressions. And that is precisely what happened. Today, with the stock trading at roughly 47x earnings and 42.5x forward earnings—based on consensus estimates of ~11% EPS growth in fiscal 2026—the overall risk profile has clearly moderated.

The key question now is whether this multiple compression was exaggerated, driven by tiny declines in renewal rates being interpreted as a structural risk, or whether it reflects something cyclical and temporary.

According to Costco’s management team on the most recent earnings call, the drop in renewal rates was described as a “slight decline” and “less than anticipated,” largely due to the rollout of targeted communications to expiring members. In other words, the issue is one of mix: digital sign-ups are growing as a share of the member base and tend to renew at slightly lower rates than warehouse sign-ups. Importantly, membership income still grew 14% year over year, and less than half of that growth came from fee increases. Excluding fee hikes and FX, membership income still grew 7.3%, reinforcing that the underlying organic engine remains healthy.

There are risks, however. Management has been explicit that renewal rates could face further modest pressure over the coming quarters as this mix shift continues to flow through the math. If the gap between the digital cohort and warehouse cohort fails to close, Costco may be entering a new renewal-rate regime—from ~90% to the high-88%/low-89% range—and that would likely reset the floor of the valuation multiple. Based on recent trends, I believe this risk is non-trivial and could continue to weigh on the stock in the quarters ahead.

Is COST a Buy, Hold, or Sell?

Bullishness still dominates among analysts covering Costco shares. Of the 25 ratings issued over the past three months, 17 rate the stock a Buy, seven recommend Hold, and only one suggests Sell. While several analysts trimmed their price targets following the Q1 results, the average target price for COST stands at $1,061.83, implying 23.4% upside from current levels.

See more COST analyst ratings

A Great Business, but Costco’s Premium Is at Risk

At this point, even modest pressure on renewal rates has become the main point of tension in Costco’s investment thesis. Consecutive quarters of declines, small as they may be, signal a minor malfunction in an engine that once seemed built to never require maintenance. With management itself signaling that further slight declines could occur throughout fiscal 2026, I see a strong likelihood that, if confirmed, this trend will continue to put meaningful pressure on Costco’s valuation premium.

As a result, even if membership income growth, comparable sales, and traffic metrics remain strong and consistent for now, I believe the stock is likely to underperform as the market recalibrates how much certainty it is willing to pay for. For that reason, I maintain a bearish stance on Costco at current levels.