After surging to a 52-week high of about $1,078 earlier this year, shares of membership-based retailer Costco Wholesale (COST 0.39%) took a huge hit. On the surface, the stock declined because the company reported worse-than-expected fiscal Q2 earnings per share and because of the higher costs Costco could face from tariffs. But if you look under the hood long enough, you'll discover even though the earnings report may have been initiated the pullback, the real issue is valuation. Costco stock has simply appreciated too much, too quickly. In other words, the hype around the stock simply led to expectations that were too high.

But now that the stock has retreated to levels back below $1,000, should investors be scooping up shares? Or is the stock still overvalued?

Resilient growth

Costco's second-quarter results for fiscal 2025 weren't quite strong enough to meet the market's high expectations. But the business itself remains in excellent shape. Net sales for Costco's second quarter of fiscal 2025 rose 9.1% year over year to $62.53 billion. Total company comparable sales increased 6.8%. Growth was 9.1% when adjusted for gas and foreign exchange, aided by 8.6% adjusted growth in the U.S., 10.5% in Canada, and 10.3% in the company's "other international" region.

Paid household memberships climbed to 78.4 million, up 6.8% from the prior year, while paid "executive members," Costco's highest membership tier, grew 9.1% to 36.9 million. Membership renewal rates remain exceptional, hitting 93% in the U.S. and Canada and 90.5% globally.

E-commerce comps jumped 22.2% year over year when adjusted for foreign exchange, with strength across home furnishings, small electrics, sporting goods, and a continued surge in demand for gold and silver. This success comes as the company is increasing its efforts on personalization.

Profitability is increasing nicely, too. Earnings per share came in at $4.02, up from $3.92 a year ago. However, last year's EPS included a $0.21 tax benefit related to the deductibility of a special dividend. Excluding that benefit, EPS grew 8.4% year over year. Operating income rose 12.3% despite currency headwinds and higher supply chain costs.

Priced for perfection

If investors looked at Costco stock's valuation today and had no context of the recent pullback in the stock price, they'd probably guess that shares were trading at all-time highs. With Costco's price-to-earnings ratio of 54, investors seem to expect high single-digit annualized sales growth and double-digit earnings-per-share growth for well over a decade. While recent business momentum bodes well for the company's future, expectations like this may be a bit too optimistic.

Investors should keep in mind that it would probably take only a small setback, whether it's an execution blunder or something external such as economic headwinds, to cause shares to rerate significantly lower.

Sure, Costco's long-term outlook remains compelling. The company continues to grow sales, earnings, and memberships while maintaining best-in-class renewal rates and cost discipline. E-commerce is gaining steam, and expansion plans remain on track. But the stock's valuation still leaves little room for error. Even after falling below $1,000 per share, Costco trades at a staggering premium. Investors buying here should be prepared for potentially modest returns if growth merely meets expectations.

Costco stock isn't cheap -- but the shares of companies of this caliber rarely are. Still, at some point, a stock simply becomes overpriced. Though shares certainly don't quite look like a sell yet, buying here could prove to be unrewarding. Investors, therefore, may want to look for a more attractive place to deploy their capital. They can always revisit Costco stock if shares dip further in the future or the stock price stalls while the fundamentals catch up. While expecting Costco shares to look cheap at some point in the near future is probably an unrealistic expectation, it's reasonable to at least hope for an entry point into the stock when shares look fairly priced. Today's not that day.