After Chipotle and Nvidia, Is Costco the Next Big Stock-Split? (And should you care?)

Stock splits are making a resurgence. Over the past 15 years, we’ve been in the middle of a raging annuity market with minimal disruption, which has resulted in big winning stocks trading at skyrocketing prices. To make it easier to offer stock options to employees and for small investors to buy stock, companies have begun implementing more stock splits. Amazon, Nvidiaand Chipotle are recent examples of stock splits, but there are many more.

Investors have built a narrative that stock splits drive value. There is the idea that by doing a stock trade at a lower price but with a higher total amount of shares outstanding, the stock is somehow cheaper. Does this narrative hold up in reality? Let’s take a look at a stock split candidate — Costco (NASDAQ: COST) — to investigate this phenomenon and whether you should buy ahead of a potential stock split announcement.

Costco’s next comma

Costco’s stock is up about 650% over the past five years and recently topped $900 a share. If it rises a little more than 10%, it will hit the $1,000 mark. A true testament to the sustainable growth of the discount retail model, Costco is now one of the largest companies in the United States with a market capitalization of $400 billion.

The stock has had a total return of 150,000% since going public over 40 years ago (total return includes reinvestment of dividends), making it one of the best performing stocks ever. For any investor who has held since the early days, a $1,000 investment would now be worth $1.5 million.

Along the way, Costco implemented two stock splits due to the increase in the stock price. One in 1993 and one in 2000. With its price approaching four figures, investors likely expect Costco to implement another stock split soon. When a stock’s price exceeds $1,000 per share, management teams will generally look to split shares to make them more affordable for investors with small amounts of money and to have more flexibility to give employees smaller slices of stock as form of income.

Examples of recent stock splits around $1,000 or more include Chipotle, Nvidia, and Broadcom. If you look at its history, Costco might be overdue for a stock split right now.

A thriving business at a premium valuation

Let’s forget the stock split for a second. How is Costco’s business doing? Well, very well, thanks for asking. In the most recent quarter that ended in May, revenue rose 9.1% year over year to $57.4 billion. Growth was strong globally, but especially internationally, where same-store sales rose 8.5 percent year-over-year when adjusted for gasoline prices. E-commerce growth was also solid at 21% in the quarter.

The international growth track looks strong. For example, a Costco recently opened in Okinawa, Japan and had a five-hour wait to get in the door on the first day. Costco has a fantastic brand overseas, perhaps even stronger than the United States, where it competes more strongly with Amazon and Walmart. Management has just raised the prices of its membership dues. Premium membership now costs $130 per year from $120 previously.

While that’s all great, the stock trades at quite a premium valuation. Compared to trailing twelve-month earnings, the stock has a price-to-earnings (P/E) ratio of 56. The stock’s 10-year average is 35, and this P/E is near its all-time high. . Also remember that Costco was a much smaller company 10 years ago.

Data on COST PE report by YCharts

Does a stock split mean you should buy the stock?

Let me cut to the chase: No one but Costco employees (who can get more flexible option packages) should care about a potential stock split. For today’s investors, stock splits are meaningless, even if it means you can buy more shares. This is especially true when considering the rise of fractional trading, where brokerages allow you to buy less than one share at a time when the price is skyrocketing, as with Costco.

A stock split is meaningless because it does not change the underlying business operations. If I give you a whole pizza and call it “a slice”, is it magically more pizza when you cut it into 12 slices? No, and the same logic applies to a stock split. Don’t buy Costco for any potential stock split, even if there might be one.

Instead, investors should focus on the business and valuing the stock based on its earning power. Costco is a great deal, there’s no denying that. But it trades at a stretched P/E and will only grow at a slow pace over the next 10-20 years due to its huge revenue base. For this reason, investors should avoid buying the stock at today’s price.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Brett Schafer has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Chipotle Mexican Grill, Costco Wholesale, Nvidia and Walmart. The Motley Fool recommends the following options: short September 2024 $52 put on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

After Chipotle and Nvidia, Is Costco the Next Big Stock-Split? (And Should You Care?) was originally published by The Motley Fool