How Costco’s Stock Can Soar On E-Commerce

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Costco Wholesale Corp. (COST) shares have stalled in recent years, barely keeping pace with the rise in the S&P 500. Part of the problem has stemmed from slowing top-line revenue growth. But a new growth driver could emerge in e-commerce that may fuel the stock price higher and even drive revenue growth. 

Walmart Inc. (WMT) shares surged in 2017 by nearly 43 percent as investors saw the big potential e-commerce could have in driving growth. But Walmart also proved how terrible it could be to please investors when expectations run wild. Its shares have fallen by over 11 percent since the company reported fourth-quarter 2017 results on February 20.

Walmart's 4Q results showed that e-commerce sales growth slowed to 23 percent year-over-year, down from the previous quarter's 50 percent growth rate. (See also: How Walmart Model Wins With 'Everyday Low Prices.')

COST data by YCharts

New Online Offerings

In October 2017, Costco rolled out two new delivery offerings: a 2-day grocery delivery service and a same-day delivery service through a partnership with Instacart. The 2-day delivery service consists of nonperishable food and sundries, while the same-day service includes milk, juice, and meat. 

The company noted on its conference call that it saw a 40 percent year-over-year jump in e-commerce sales to $1.3 billion when it reported fiscal first-quarter 2018 results. The results were a big jump from 2017, which showed a rise in e-commerce sales of only 15 percent to $4.6 billion.

Catching Attention

The recent spike in e-commerce sales has even caught the attention of some Wall Street analysts. BMO Capital Markets noted in December after Costco reported its fiscal first-quarter 2018 results that its online business was in the early stages and could accelerate. 

Ahead Of Walmart

The overall total revenue Costco is posting when compared to Amazon.com (AMZN) is minute, but Costco may already be ahead of Walmart. When Walmart recently reported its financial results, it showed that for all of 2017, e-commerce sales totaled $11.5 billion, and that accounted for only 2.2 percent of total sales.

In contrast, Costco's latest results indicate that e-commerce accounted for about 4 percent of its total sales of $31.8 billion. Costco also has the benefit of having 90.3 million worldwide members. 

To this point, investors have yet to go wild over Costco's e-commerce opportunity like it did for Walmart. But perhaps another couple of quarters of big growth rates might do the trick. (See also: Costco’s Business Model Is Smarter Than You Think.)

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.