Prediction: The Stage is Set for a Costco Stock Breakout

Shares of Costco (NASDAQ:COST | COST Price Prediction) have been in comeback mode since the start of the year, now up close to 23% year to date. The bulk-buy retailer has really made up for lost time, and with the stock going for around $1,050 per share, I’m sure many are watching closely for some sort of breakout moment. Indeed, shares are close to 2% from the heights of last year.

And while it appears that the stage is set for a breakout, investors might wish to take a step back and consider what has changed in the past year and the likely drivers that can help power a move to new heights. Indeed, the technical picture is starting to look good, especially if you haven’t been keeping up with Costco stock since it flirted with a bear market as the S&P 500 and Nasdaq 100 flew much higher.

Indeed, it’s quite rare to get such a premium defensive growth stock on sale, at least relatively speaking, while it’s been trailing the market for more than a year. With quarterly earnings on tap before the month’s end, questions linger as to whether it’s going to be earnings or something else that helps Costco stock hit a new watermark.

Inflation is becoming a problem again. Costco is a proven place to shelter from such a storm

As Costco continues investing to improve the customer experience while passing on more value to its members, I think it’ll be tough to stand in the firm’s way, especially as the wave of inflation hits hard, forcing consumers to do whatever it takes to stretch their dollar again. When inflation tides rise, a Costco membership can seem like a liferaft, provided that you can find parking and can load up the massive shopping cart with equally sizeable deals.

What I find most interesting about the Costco story is how well the firm has been able to execute on the digital front of late. The e-commerce growth numbers really did stand out. And I think that kind of growth has staying power.

Undoubtedly, Costco has been quite slow to the digital transformation, but as it levels up its e-commerce platform while expanding its physical presence, with 28-30 new warehouses expected to be opened every year, I see the firm amplifying its success as we enter an environment where the consumer will be put on the ropes while deals elsewhere begin to dry up.

Costco might be getting expensive again, but the right drivers are in place

Time will tell if Costco now has what it takes to break out to hit new all-time highs. But I certainly wouldn’t bet against the firm considering the macro picture, the technicals, the recent quarterly strength, and a handful of upbeat commentary from sell-side analysts. Some analysts think the digital strength is a big driver and one that might not yet be factored into the current price of admission.

One major risk outlined by TD Cowen analyst Oliver Chen is complacency. He’s right. Just because the stage is set doesn’t mean Costco will put on an applause-worthy performance. Given Costco’s track record of operating at a high level, though, I just don’t see Costco fumbling the ball here, even as expectations grow to be a bit higher going into its coming quarter.

After the latest melt-up, Costco stock trades at 54.5 times trailing price-to-earnings (P/E). On the surface, the name is getting expensive again. If positive margin trends prove just the start, though, as inflation pushes consumers back towards shopping at the retailer that promises the most value, let’s just say I wouldn’t want to bet against Costco stock making new highs at some point over the summer. Perhaps it’s the ultimate defensive growth play for investors ready to move on from the hot AI stocks.