Are you considering stepping into (or remaining in) a position in Sirius XM Holdings(NASDAQ: SIRI)? If so, you’re not alone.
Although its satellite radio business hasn’t exactly been red-hot in a while, its 2019 acquisition of music-streaming service Pandora, along with its new focus on advertising-supported radio, are catching investors’ attention for good reason. The stock’s been a poor performer of late, but some investors still sense lots of long-term potential from the new and improved Sirius.
However, if you’re looking for a more proven workhorse, consider owning a piece of Costco Wholesale(NASDAQ: COST) instead. It’s made far more millionaires than Sirius XM has. It’s also a much safer bet that it will continue doing so into the foreseeable future.
Costco is, of course, the powerhouse of the club-based retailing industry. As of the end of last month, nearly 139 million cardholders were paying $65 per year (or $130 for additional perks) for the right to shop at its roughly 900 stores. The $440 billion company does on the order of $250 billion worth of business per year, turning more than $7 billion of that into net income.
It’s been a growth juggernaut. With a slight and short-lived exception in 2009 due to the economic turbulence stemming from the prior year’s subprime mortgage meltdown, this retailer has reported sales growth in every quarter going back to its 1985 initial public offering.
Granted, new store builds have helped, though not as much as you might expect. Only once since 2019 has Costco reported a monthly decline in same-store sales. That was in April 2020, when COVID-19 pandemic shutdowns made it impossible to continue doing business as usual.
Data source: Costco Corp. Chart by author. Sales data is in billions.
As I said, this company is a juggernaut. Granted, it’s now also a massive player in a crowded, slow-moving market. Not only is it going head-to-head with Walmart‘s Sam’s Club, it also obviously competes with Amazon for people’s spending dollars. Both are tough (not to mention bigger) rivals.
However, Costco still enjoys a handful of competitive edges that can continue to make millionaires out of patient investors. At first blush, it seems a ho-hum investment prospect. While no one denies that Costco is formidable, selling consumer goods isn’t exactly a high-growth business, no matter how good you are at it.
Don’t look past this company’s long-term potential from here, though. The stock’s 10,000% gain over the course of the past 40 years isn’t a too-terribly tough act to follow — and that’s for a couple of reasons.
First, although the idea of paying a yearly fee for the privilege of being able to shop with a particular store chain might have seemed outrageous to many customers in the business’s infancy, people have become quite comfortable with subscription-based consumerism. From streaming services and mobile phones to meal kits, software, and gym memberships, most people accept that this is now a not-so-new norm.
This dynamic pairs nicely with the other new dimension of modern retailing. That’s the empowerment offered by the internet. Never before have people been better equipped to compare prices, and then crunch a few numbers. More than 77 million households and businesses have figured out that being a Costco member ultimately saves them money, even with its relatively high annual fees and sometimes inconvenient bulk packaging.
It seems to be working. CFRA Research reports that club-based stores like Costco are indeed “absorbing market share from supermarkets” such as Kroger and Albertson’s.
Now, this relatively American phenomenon is moving overseas. While most of Costco’s stores are located in the United States (with 108 in Canada), it’s now growing its international arm just as quickly as its domestic operation. It opened three overseas stores last quarter, with plans to add another four before the end of this fiscal year to bring this count up to 175.
Meanwhile, the club-based retailer intends to open 14 more U.S. stores this year, capitalizing on the still-maturing shopping preferences of domestic consumers.
This will still only scratch the surface of the world’s multi-trillion-dollar consumer goods market, which — if nothing else — continues to expand thanks to sheer population growth. The continued proliferation of telecom technology and ongoing urbanization only bolsters this tailwind. Costco will win more business as it gives itself a chance to do so.
Is this stock poised for immediate and massive gains? No. Even in good years, this retailer’s top-line growth is limited to single digits. That’s not likely to change in the foreseeable future.
The shares are also expensive, trading at 55 times this fiscal year’s projected per-share profits of $18.02. The analyst crowd is seemingly concerned about this valuation, too. Nearly half of them are rating Costco stock as a hold rather than as a buy, while shares are priced just a little less than analysts’ current consensus target of about $1,011.
Costco might be a slow grower, but it’s a reliable grower in any and all environments. The company has clearly mastered the art and science of membership-based warehouse shopping. Profits are also growing faster than revenue is, with the benefits of scale being increasingly realized as the company expands.
The point is, this is a quality business that you should expect to pay a premium to participate in — even if a bunch of analysts don’t quite see it that way right now. It’s not easy to confidently say the same of Sirius XM at this time.
The trick? You just need to be willing to stick with Costco for the long haul to fully capitalize on its potential. It’s a slow-and-steady-wins-the-race kind of trade, whereas Sirius XM leans more toward an all-or-nothing, lightning-in-a-bottle prospect.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.
