Key Points
Both Costco (NASDAQ: COST) and Amazon (NASDAQ: AMZN) have delivered growth to investors over time. They each sell a wide variety of grocery and essential items as well as general merchandise — though Costco is present in e-commerce, the lion’s share of its business is through its warehouses. And though Amazon owns physical stores — Whole Foods markets — its main retail business is e-commerce.
Which of these two retail leaders makes the better stock to buy right now? Let’s find out.
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The case for Costco
Costco is a business that may perform well during any market environment as it offers customers the opportunity to buy essentials for dirt cheap prices. The company does this because it buys in bulk — and often offers these items to its customers in bulk too. The problem is Costco’s margins are low on the items it sells, but that is fine because the company actually generates most of its profit another way: through the membership fees you pay to shop there.
Shoppers favor shopping at Costco to amortize the membership fee and, on top of that, want to benefit from all the great deals. This is the scenario that’s likely played out over time as the company has grown its earnings.
COST Net Income (Annual) data by YCharts
Today, Costco shares trade for 48x forward earnings estimates, down from more than 55x about a year ago.
The case for Amazon
Amazon, like Costco, focuses on value for its customers and offers a membership program called Prime — but you don’t have to be a Prime member to shop there. The company also may see sales remain steady or even grow during difficult times because, like Costco, it benefits as customers seek the lowest prices.
The company in recent years has improved its cost structure — for example, reorganizing its fulfillment model from national to regional — to favor earnings growth over time.
Amazon’s biggest profit driver, though, isn’t its retail business. It’s Amazon Web Services (AWS), the company’s cloud services unit — and this part of the company has seen revenue soar amid the demand for its artificial intelligence (AI) products and services.
Like Costco, Amazon’s valuation also has declined, to 25x forward earnings estimates from more than 35x about six months ago.
Which stock is the better buy?
Both stocks make excellent additions to a long-term portfolio today. They are trading at cheaper levels than they were a few months ago, and they are now very reasonably priced. These companies also have proven their strengths over the long term and have what it takes to manage any short-term headwinds and climb over the long run.
Your buying decision depends on your investment style and strategy. If you’re a cautious investor, you may prefer Costco for its strong retail profile and dividend payments. If you’re looking for more exposure to growth, however, you may choose Amazon for its dominance in the high-potential area of AI.
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Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Costco Wholesale. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
