BYU Student Author: @Michael_Barney
Reviewers: @Saul_Esplin, @Jason_Nguyen
Estimated Time to Solve: 30 Minutes
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Overview
At the end of 2024 the stock market has been experiencing a period of heightened volatility, with valuations across several sectors reaching all-time high levels. Many analysts argue that the current market environment mirrors past periods of speculative excess, with companies being priced at significant premiums relative to their earnings potential. The S&P 500 is trading at a valuation level that some experts consider stretched, driven largely by enthusiasm for mega-cap technology stocks and an influx of retail investors. This has led to concerns that certain companies may be trading at prices that are difficult to justify based on traditional financial metrics.
In 2024 Costco Wholesale Corporation drew significant attention due to its high valuation. As a dominant force in the retail sector with a loyal customer base and a well-established membership model, Costco continues to demonstrate consistent revenue growth and financial resilience. However, recently its stock has been trading at a price-to-earnings (P/E) ratio well above historical averages, prompting debate among investors. Some argue that Costco’s premium valuation is justified by its strong financial performance and growth potential. Others contend that the stock is overpriced, particularly when compared to competitors like Walmart and Target, which trade at lower multiples.
This challenge invites you to use generative AI to evaluate Costco’s financials and determine whether its current stock price is warranted. By gathering and analyzing key metrics—such as earnings per share (EPS), revenue growth, profit margins, and valuation ratios—you will assess whether Costco’s market price aligns with its fundamentals. Additionally, this exercise will help you develop better prompt-engineering skills, allowing you to generate more insightful and data-driven financial analysis using ChatGPT.
Instructions
- Your first task is to prompt ChatGPT to find Costco’s year-end financial data for the year ending 2024 (Ticker: COST). Prompt ChatGPT to use sources such as:
- Yahoo Finance
- Macrotrends
- SEC EDGAR Database
Review the data provided and ensure it includes accurate end-of-year financials.
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Now, prompt ChatGPT to extract the most important valuation and financial ratios from the data like EPS (earnings per share), P/E ratio (price to equity ratio), Return on Equity, Return on Assets etc. Take note of these ratios, as they will be used for industry comparison.
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Next, prompt ChatGPT to compare these metrics to industry averages and norms.
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Now, test the validity of ChatGPT’s work by prompting the AI to determine if the stock is appropriately priced. This will encourage ChatGPT to refine its reasoning, suggest different valuation methods (like Discounted Cash Flow), and highlight potential biases in its response.
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After reviewing ChatGPT’s final analysis, summarize your findings:
- Is Costco overvalued, undervalued, or fairly priced?
- Which financial metrics influenced the decision the most?
- Do you agree with ChatGPT’s conclusion? Why or why not?
- Post your answers to these questions based on the information given from ChatGPT, as well as any key prompts that were used to help derive your answers.
Solution