Are you considering taking (or staying) a position in Sirius XM Holdings (NASDAQ: SIRI)? If so, you’re not alone.
While the satellite radio business hasn’t exactly been hot for a while, its 2019 acquisition of music streaming service Pandora, along with its new focus on ad-supported radio, is attracting investor attention for good reason. The stock has been underperforming lately, but some investors still sense a lot of long-term potential from the new and improved Sirius.
However, if you’re looking for a more proven workhorse, consider owning one Costco Wholesale (NASDAQ: COST) instead of. It has made many more millionaires than Sirius XM. It’s also a much safer bet that it will continue to do so for the foreseeable future.
Costco is, of course, the powerhouse of club-based retail. Late last month, nearly 139 million cardholders paid $65 a year (or $130 for additional benefits) for the right to shop at its approximately 900 stores. The $440 billion company does about $250 billion in business annually, and converts more than $7 billion of that into net income.
It’s been a growth juggernaut. With a small and short-lived exception in 2009 due to the economic turbulence caused by the subprime mortgage collapse last year, this retailer has reported quarterly sales growth dating back to its 1985 IPO.
Granted, building new stores has helped, but 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 the corona pandemic made it impossible to continue as normal.
Like I said, this company is a juggernaut. Granted, it’s also now a huge player in a crowded, slow-moving market. Not only do they compete against each other Walmart‘s Sam’s Club, with which it of course also competes Amazon for people’s spending dollars. Both are tough (not to mention bigger) rivals.
However, Costco still has a handful of competitive advantages that could continue to turn patient investors into millionaires. At first glance it seems like a boring investment prospect. While no one denies that Costco is formidable, selling consumer goods isn’t exactly a fast-growing business, no matter how good you are at it.
From here, though, look no further than this company’s long-term potential. The stock’s 10,000% gain over the past 40 years isn’t all that hard to follow – and that’s for a number of reasons.
First, while the idea of paying an annual fee for the privilege of shopping at a particular retail chain may have seemed outrageous to many customers in its infancy, people have grown 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 normal.
This dynamic fits nicely with the other new dimension of modern retail. That is the power that the internet offers. Never before have people been better equipped to compare prices and then crunch some numbers. More than 77 million homes and businesses have found that Costco membership ultimately saves them money, even with the relatively high annual fees and sometimes cumbersome bulk packaging.
It seems to work. CFRA Research reports that club-based stores like Costco are indeed “absorbing market share from supermarkets,” as Kroger And Albertsons.
Now this relatively American phenomenon is moving abroad. Although most of Costco’s stores are in the United States (with 108 in Canada), its international presence is now growing as quickly as its domestic operations. Last quarter it opened three foreign stores, with plans to add four more to take the number to 175 before the end of this fiscal year.
Meanwhile, the club-based retailer plans to open an additional 14 U.S. stores this year, tapping into the still-maturing shopping preferences of domestic consumers.
This will still only scratch the surface of the multi-trillion dollar global consumer goods market, which – if nothing else – continues to grow thanks to massive population growth. The continued proliferation of telecom technology and ongoing urbanization only amplify these tailwinds. Costco will bring in more customers if it gives itself the opportunity to do so.
Is This Stock Poised for Immediate and Huge Gains? No. Even in good years, this retailer’s sales growth remains limited to single digits. It is not likely that this will change in the near future.
The shares are also expensive, trading 55 times against this fiscal year’s expected earnings per share of $18.02. The analyst crowd also seems concerned about this valuation. Nearly half of them rate Costco stock as a hold rather than a buy, with the stock priced just slightly below the current analyst consensus target of around $1,011.
Costco may be a slow grower, but it is a reliable grower in all environments. The company has clearly mastered the art and science of membership-based warehouse stores. Profits are also growing faster than sales, with economies of scale increasingly realized as the business grows.
The point is, this is a quality company that you can expect to pay a premium to be a part of – even if a number of analysts don’t quite see it that way at the moment. It’s not easy to say the same about Sirius XM with confidence at this point.
The trick? You just have to be willing to stick with Costco for the long term to fully realize its potential. It’s a trade that’s slowly but surely winning the race, while 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 holds and recommends positions in Amazon, Costco Wholesale, and Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.
Should You Forget Sirius XM? This Stock Has Made Many More Millionaires was originally published by The Motley Fool
