Costco stock price has dived in the past few days as concerns about the US recession and tariffs continued. COST has crashed in the past six consecutive days, moving to its lowest level since November 6 of last year. It has dropped by over 17% from its highest level this year.
Two reasons why Costco stock has crashed
There are three main reasons why the Costco share price has crashed in the past few days. First, it has dropped because of the ongoing recession risks that have triggered a tariff tantrum among investors.
Tariffs will make it more expensive for a company like Costco to import its products from neighboring countries like Canada and Mexico. This, in turn, could hurt its margins since the company will likely not increase its membership costs.
Additionally, higher tariffs may turn off consumers now that inflation is a big concern in the US. The most recent data showed that the headline and core consumer inflation data dropped to 2.8% and 3.1%, respectively.
Still, fundamentally, Costco may become one of the top beneficiaries of the ongoing trade war since it does well in all market conditions.
Read more: Deep dive: Why Costco’s Q2 pleased investors despite an earnings miss
Costco valuation concerns
Second, and most importantly, Costco is one of the most overvalued players in the retail industry because of its strong market share.
At its peak this year, Costco had a market cap of over $478 billion, which has dropped to $395 billion, meaning that it has gone through an $83 billion wipeout.
A $478 billion or even $395 billion valuation is quite expensive for Costco because of its profits and revenue growth.
The most recent annual results showed that Costco generated over $254 billion in revenue and a net profit of $7.3 billion. This means that at its peak, the company had a price-to-earnings (PE) multiple of 65. Even today, the company has a P/E ratio of 54 and a forward ratio of 50.
Costco deserves a premium valuation because it is the biggest wholesale group in the United States and globally. However, it is still hard to justify this valuation since the company is not growing as it did in the past.
Costco Wholesale has a revenue growth of about 6% and a forward EBITDA growth of 11.52%. Its net profit margin is 2.90%.
In contrast, NVIDIA has a forward price-to-earnings ratio of 26, a revenue growth metric 60% and an EBITDA growth of 68. That is a sign that investors believe that Costco has a better growth potential than NVIDIA.
Similarly, Microsoft has a forward PE ratio of 28, revenue growth metric of 15, and an EBITDA growth of 54.
Therefore, there is a likelihood that the company is going through a valuation reset as recession risks rise.
Read more: Costco stock price forms risky patterns: is the bubble about to pop?
Costco stock price analysis
The daily chart shows that the COST share price has been in a strong downtrend after peaking at $1,080 earlier this year. This crash is in line with our recent COST stock forecast.
It has now dropped below the crucial support level at $900, the lowest swing in January this year.
The stock has dropped below the 50 and 100-day weighted moving averages, a sign that bears are in control.
More data shows that Costco’s MACD and the Relative Strength Index (RSI) have continued falling this year. They have now moved to the oversold level.
Therefore, the stock will likely drop for a while and possibly retest the support at $850 and then resume the uptrend as the tariff tantrum fades. If this happens, the Costco stock price will rise from the current $890 to $1,200 as Wall Street analysts estimate.
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