Costco Wholesale (COST -0.17%) has been a dominant player in the retail space for decades. For its shareholders, the results have been even more impressive. Over the past five years, Costco's stock performance has outpaced the S&P 500 by nearly 150 percentage points. Looking back 10 years, the stock has more than tripled the market's return.

As is the case with most stocks that post market-beating returns, Costco stock trades for a premium. At this writing, shares trade for 62 times trailing earnings, only slightly below the stock's 10-year high of 63. Until recently, this nosebleed valuation has kept me away from buying shares.

Here's why I changed my mind and added Costco to my portfolio.

Channeling my inner Peter Lynch

Investor Peter Lynch is famous for investing in what he knew. Using what he noticed in his own life as a starting point for finding winning investments made Lynch one of the most successful investors of all time. When I look at the world through this lens, it's hard to stay away from Costco stock. The locations near me are almost always crowded, and I inevitably end up spending more money than I intended when I walked through the door.

While this boots-on-the-ground observation can be a good starting point, deciding to invest takes a little more work. Fortunately, the financial results back up the anecdotal data. In Costco's first quarter of fiscal 2025 (reported in December), comparable-store sales and comparable traffic grew by 5%. Put another way, existing stores saw their sales and the number of shoppers increase 5% compared to Q1 2024.

These customer metrics helped drive revenue growth of 8% and net income growth of 13%. Zooming out, revenue and net income growth over the past five years have grown impressively. The stock is expensive, but the results are there to back up at least some of the premium price.

Data by YCharts.

Costco's balance sheet has hidden value

One of the distinguishing aspects of Costco's business model is its membership fees. As of Q1 2025, Costco had more than 77 million paid memberships and 139 million total cardholders. Revenue from these memberships was $1.2 million in Q2, up 8% from the year-ago quarter.

In September, Costco raised membership fees by 8%, which is something the company does every few years. It will take a few quarters for this additional revenue to make its way through the business, so this is one way in which today's backward-looking valuation metrics may not be fully reflecting future results.

Costco is also a large landowner. As of the end of its 2024 fiscal year, Costco owned 79% of its land and buildings. While this ownership stake is disclosed in the company's financial filings, it's not often taken into account when considering how expensive the stock is.

Price does matter concerning Costco stock

When it comes down to it, while I think there are some ways in which today's valuation doesn't fully capture Costco's future potential, today's price is still beyond what I would consider to be fairly valued. This is why I bought only a small position to start. I admire the company, believe in its future, and wanted it in my portfolio so I could learn more and track its results.

It's very likely that at some point there will be a more compelling value point, at which time I can add to my position. This is the lesson I've learned from following Costco for years before buying shares. By dollar-cost averaging into a position, I can own a business I admire while strategically adding over time.