Costco Wholesale Corp. has reported impressive financial results, yet its stock has seen a significant decline. On December 11, 2025, the company announced that its free cash flow (FCF) surged to $3.162 billion for the fiscal first quarter ending November 23, 2025, marking a 58.4% increase year-over-year. Despite this strong performance, Costco’s stock price has dropped 8.7% over the past year, closing at $873.35 on December 26, 2025. This decline raises questions about whether Costco shares are now undervalued, potentially offering a lucrative opportunity for investors.
The stock closed slightly higher than a recent low of $850.00 on December 22, but remains down nearly 8.66% from $956.14 a year ago. Year-to-date, the stock price has decreased 4.68% from $916.27 on December 31, 2024. Analysts suggest that the fundamentals of Costco’s business do not justify this downward trend.
Strong Financial Metrics Indicate Potential Growth
Costco’s latest figures reveal robust growth, with total revenue for the fiscal first quarter increasing by 8.28% compared to the previous year. On a comparable store basis, revenue rose by 6.4%. The substantial increase in free cash flow is particularly noteworthy, as it indicates the company’s ability to generate cash efficiently. Additionally, the FCF margin improved to 4.70%, compared to 3.21% from the same period last year, reflecting a 46% enhancement in operational efficiency.
Over the trailing twelve months, Costco’s FCF reached over $9 billion, up from just over $5 billion last year. This significant increase in cash flow suggests that the stock should command a higher valuation. Analysts expect continued growth, projecting sales of $297.14 billion for the fiscal year ending August 31, 2026, which is an 8% increase from $275.2 billion the previous year.
Valuation Estimates and Future Outlook
Using these sales projections, it is feasible to estimate that Costco’s FCF for the next twelve months could reach approximately $10.68 billion, which represents a 36.3% increase over the $7.837 billion generated in fiscal 2025. If Costco were to distribute 100% of its FCF, the dividend yield could theoretically rise to 2.40%, significantly enhancing its attractiveness to dividend-focused investors.
Currently, Costco pays out only 25% of its FCF as dividends, resulting in a modest yield of 0.60%. This payout approach and the potential for increased dividends lead to a projected market value of $445 billion, which is 15% higher than its current market cap of $387 billion, according to Yahoo! Finance.
Analysts concur on the stock’s potential upside. Average price targets from various sources suggest Costco stock could be worth around $1,031.67, representing an 18% increase from current levels. With estimates varying from $947.26 to $1,048.31, consensus indicates a significant upside potential.
In summary, despite its recent stock price decline, Costco’s strong financial performance and growth outlook position it as an attractive option for value investors. As the company continues to improve its operational efficiency and free cash flow, there is strong potential for a rebound in its stock price over the coming months. Investors may want to consider this opportunity as part of their strategy moving forward.
