Berstein downgrades Costco, says memberships will be the first to go in an economic downturn

Investors have overestimated the growth potential of wholesale retailer Costco, according to A.B. Bernstein.

The firm downgraded the stock to underperform from market perform. Costco shares fell 0.9% in premarket trading.

“We think valuation is too high and investors are likely overestimating the continuation of COST’s trend and/or pace of reinvigorated growth,” said Bernstein’s Brandon Fletcher in a note to clients Wednesday after the bell.

Shares of Costco have had a great multi-year run. Since 2017, the stock has rallied more than 82%. However, Fletcher said analysts have overestimated Costco’s growth rate in the U.S. and internationally. He said investors in Costco are overpaying for the quality of earnings, dividends and defensiveness.

These days, every company wants an annual subscription fee to boost margins, but this trend is causing a membership exhaustion. Fletcher said there is competitive pressure, especially from companies like Amazon, as Costco reaches peak membership numbers.

Although consumer spending is still strong, in a possible economic downturn, members will rethink their spending and membership fees.

“Potentially more aggressive competitor offerings in Convenience or Service that draw away members in new ways,” Fletcher added.

Fletcher also said investors are putting too much emphasis on Costco’s growth internationally.

“Internationally, we think COST’s growth in China will go more slowly than most investors might expect,” he said.

Despite the downgrade, Bernstein raised its price target on the stock to $230 from $220, citing near term fundamentals. Costco trades around $292 per share.

—with reporting from CNBC’s Michael Bloom.