Buy Costco because it’s in ‘early stages’ of online sales surge

Buy Costco because it’s in ‘early stages’ of online sales surge

Costco shares tumbled this summer on worries the Amazon-Whole Foods Market merger will hurt the retailer’s business.

But one Wall Street firm says the retailer’s e-commerce growth will be a catalyst to lift Costco stock to new heights.

BMO Capital Markets raised its rating for Costco shares to outperform from market perform, citing the company’s surging online sales growth.

“We believe an acceleration in Costco’s online business is in early stages and could continue to support a strong comp outlook and higher valuation as the company widens its competitive moat,” analyst Kelly Bania wrote in a note to clients Monday.

The retailer reported better-than-expected fiscal first quarter earnings results Thursday. Costco’s online comparable sales rose more than 40 percent in the November quarter versus the 21 percent growth in the previous quarter.

Bania increased her price target for the stock to $215 from $160, representing a 12 percent upside from Friday’s close.

The analyst said Costco’s strong online sales results will likely continue now that the retailer just launched two online grocery delivery offerings in October. She noted that Costco’s membership renewal rate stayed at a solid 90 percent in the U.S. and Canada during the fiscal first quarter.

“We believe that Costco now has more valuation support given its potential to gain a greater share of total wallet from its loyal membership base,” she wrote.

Costco shares have rebounded from that summer dip and are up 20 percent year to date through Friday, matching the S&P 500’s gain. The price was up slightly on Monday.

— CNBC’s Michael Bloom contributed to this story.

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