Costco Wholesale (NASDAQ: COST) has delivered exceptional returns for shareholders across many years. From 2000 onward, shares have climbed close to 1,700%. Including reinvested dividends, the total return reaches about 2,500%. These results stem from a resilient business model that recently introduced a fresh growth driver.

Still, purchasing shares at present means accepting the chance of a notable decline sometime within the coming three years. The reasons follow below.

Costco's core approach

Costco generates revenue mainly through two channels. Its retail operations involve selling goods both in physical locations and via digital platforms. During the fiscal third quarter of 2024, product sales reached nearly $57.4 billion. Associated costs, primarily merchandise expenses, totaled around $51.2 billion. This leaves a margin of $6.2 billion.

Additional factors on the income statement include selling, general, and administrative costs required to operate the worldwide store network. These SG&A expenses amounted to roughly $5.1 billion in the same quarter. After subtracting this figure from the earlier margin, store-level profit stands near $1.1 billion.

The membership structure adds another layer, as shoppers must pay annual fees to access the stores. These fees carry minimal direct costs and contribute substantially to profits. Membership revenue in the fiscal third quarter slightly exceeded $1.1 billion. Operating income totaled about $2.2 billion, with membership fees supplying roughly half and store activities the balance.

COST data by YCharts

Costco recently revealed plans to raise membership fees to $65 annually for standard members and $130 for executive members, up from $60 and $120 respectively. This 8.3% increase in both tiers will add directly to operating income. Full realization will require at least one year as renewal dates vary, yet the adjustment clearly supports further expansion beyond retail performance.

The main challenge in acquiring Costco shares

Investors on Wall Street recognize the power of Costco's membership-driven model. Revenue has expanded at nearly 9% annually over the past decade, while earnings have grown almost 12% per year. This track record explains the strong share performance. The forward path, however, remains uncertain and may prove less favorable.

Costco currently trades at a price-to-earnings ratio near 50, compared with its five-year average just below 40. The present multiple sits 25% above the historical norm and approaches record highs for the company. Costco represents a strong enterprise, yet ownership today carries a premium price.

COST data by YCharts

Long-term price charts show steady upward movement, but examining drawdowns reveals frequent drops of 20% to 40% or greater. The latest retreat measures only about 8%, which may not offer an attractive entry given the elevated valuation.

COST data by YCharts

With the current premium valuation and broader markets near peaks, a larger price correction appears probable within three years. This could affect Costco specifically or coincide with a wider market decline that hits previously favored names hardest.

Significant pullbacks are common for high-growth companies, yet buyers must be ready to endure them when purchasing shares now.

Why waiting may prove wiser for Costco

Even strong businesses can become poor investments when acquired at excessive prices, a principle emphasized by Benjamin Graham and applied by Warren Buffett. This caution seems relevant to Costco at present. Patient buyers may find improved entry points over the next three years amid today's high valuation. Current holders should also anticipate possible further declines.

Is now the moment to invest $1,000 in Costco Wholesale?

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Reuben Gregg Brewer holds no positions in the stocks discussed. The Motley Fool maintains positions in and endorses Costco Wholesale. The Motley Fool follows a disclosure policy.

The perspectives shared here belong to the author and may not align with those of Nasdaq, Inc.