Costco (COST, Financial) is experiencing significant membership growth following the implementation of a new membership scanning system aimed at curbing membership sharing. Morgan Stanley anticipates this initiative will lead to a substantial increase in the number of paid memberships, estimating a rise of 4 million new members in North America.
Morgan Stanley's analysis suggests that for every 1% increase in membership, Costco sees an approximate 0.37% rise in operating profit and earnings per share (EPS). The introduction of membership scanners is expected to foster growth similar to Netflix's experience with account sharing restrictions. Netflix saw a 20-25 million increase in memberships after such measures.
For fiscal year 2025, under a basic growth scenario, Morgan Stanley projects an 8% increase in membership, translating to a $0.54 rise in EPS. In a more aggressive scenario, the membership could rise by 12%, with an EPS increase of $0.82. The outlook for 2026 suggests an EPS of $20.50, supporting Morgan Stanley's "Overweight" rating for Costco stock with a target price of $950.
Analysts also note Costco's unique business model, combining a membership-based warehouse format with a focus on high-quality, value-oriented products, which drives customer loyalty. This model gives Costco a competitive edge in offering attractive everyday groceries, aligning with the increased value consciousness of American shoppers.
Despite its relatively high valuation with a price-to-earnings ratio of 50, compared to the industry average of around 14, analysts remain optimistic about Costco's consistent sales and earnings growth potential.
