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YCharts data shows that the current P/E ratio for Costco is at its highest point since April 1999, when it reached 56.4. Following this peak, the stock price experienced a significant decline of over 20%. Although there was a temporary recovery, a more severe drop of over 40% occurred in 2000.
The question now is whether history will repeat itself. While it is difficult to make predictions based on a single past event, it is worth noting that the previous high P/E ratio in 1999 coincided with the dot-com bubble burst, which affected many overvalued stocks, including Costco.
While there are similarities between 1999 and the current market environment, such as high valuations and concerns about bubbles (now related to AI rather than e-commerce), Costco has shown resilience and consistent market share gains. Some analysts believe that despite its high valuation, Costco’s strong business model and growth prospects justify its premium stock price.
However, it is essential to consider whether Costco’s earnings growth can support its current valuation. If earnings do not increase significantly, the stock price may eventually adjust to reflect more realistic growth expectations. While a decline in the stock price could present a buying opportunity for long-term investors, the potential for such a correction will depend on Costco’s ability to accelerate earnings growth in the future.
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Disclosure: Keith Speights currently holds no positions in the mentioned stocks. However, The Motley Fool maintains positions in and endorses the investment in Costco Wholesale. Adhering to a strict disclosure policy, The Motley Fool ensures transparency and reliability in all its recommendations.
