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As part of our ongoing series, each week we typically conduct a DCF on one of the companies in our screens. This week, we’re analyzing a retail powerhouse that continues to quietly deliver exceptional results — Costco Wholesale Corporation (COST).

Profile

Costco Wholesale Corporation (COST) is one of the largest membership-based warehouse retailers in the world, offering a limited selection of carefully curated products at low prices. With a disciplined operating model, high inventory turnover, and a loyal customer base, Costco consistently ranks among the most admired companies in retail. Its steady free cash flow generation and net cash balance sheet make it a rare combination of quality and financial strength.
 

DCF Analysis

Inputs

Discount Rate: 10%
Terminal Growth Rate: 3%
WACC: 10%

Forecasted Free Cash Flows (FCFs) in billions

Total Present Value of FCFs = 27.82 billion

Terminal Value Calculation

Using the perpetuity growth model:

Terminal Value = (FCF_2029 × (1 + g)) / (r – g)
= (8.7 × 1.03) / (0.10 – 0.03)
= 8.96 / 0.07
= 127.99 billion

Present Value of Terminal Value = 127.99 / (1.10)^5 = 79.50 billion

Enterprise Value Calculation

Enterprise Value = Present Value of FCFs + Present Value of Terminal Value
= 27.82 + 79.50
= 107.32 billion

Net Debt Calculation

Net Debt = Debt – Cash
= 8.27 – 11.14
= –2.87 billion

Equity Value Calculation

Equity Value = Enterprise Value – Net Debt
= 107.32 – (–2.87)
= 110.19 billion

Per-Share DCF Value

Shares Outstanding = 443.126 million
Per-Share DCF Value = 110.19 billion / 0.443126 billion = $248.74

Conclusion

DCF Value: $248.74
Current Price: $982.91
Margin of Safety: –74.7%

Based on this DCF valuation, Costco appears significantly overvalued. The calculated intrinsic value of $248.74 per share is well below the current market price of $982.91, resulting in a negative Margin of Safety of –74.7%.

While Costco remains one of the highest-quality operators in retail with a fortress balance sheet and a loyal customer base, the current valuation implies a steep premium. Unless growth materially exceeds conservative expectations, much of the company’s long-term upside may already be priced in.

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