Amazon (AMZN 3.43%) and Costco Wholesale (COST 1.01%) are two top stocks that have both created shareholder wealth for decades. They sell many similar products, but they operate vastly different retail models. Does one beat out the other as a stock to buy right now? Let's check it out.
Comparing current and past performance
Amazon has a vast business with multiple categories from e-commerce to cloud computing to streaming, while Costco operates a membership retail warehouse model. There's no question that Amazon easily beats Costco as a growth stock over its lifetime. Even early in the pandemic, when Costco was posting some of its best performance ever, Amazon's sales were still growing faster, despite its bigger size. They have both been struggling now in the aftermath but recently demonstrated a rebound. Let's see the most recent numbers.
| Company | Sales Growth | Earnings Per Share (EPS) Change | Operating Margin |
|---|---|---|---|
| Costco | 9.4% | 16% | 3.5% |
| Amazon | 13% | 236% | 7.8% |
Data source: Costco and Amazon quarterly reports. Amazon metrics are from the 2023 third quarter. Costco metrics are from the fiscal 2023 fourth quarter (ended Sept. 3). All growth metrics are year over year.
Even under stress, Amazon has outperformed Costco on these key metrics.
Comparing future opportunity
Since stock-picking is future oriented, it's much more important to see where each company is going rather than focus on the past.
Costco's growth opportunities reside in increasing membership by incremental amounts and opening new stores. Comparable-sales growth is strained right now due to inflation, but the company typically demonstrates mid- to high-single digit percentage comparable sales growth. Membership increased 7.9% year over year in the fiscal fourth quarter (ended Sept. 3), and membership fee income increased as a percentage of sales from 1.88% to 1.95%. It will also likely raise its annual membership fee, which stands at $60 for a basic membership, sometime soon. That will lead to an increase on the bottom line.
It operates 862 stores as of the end of October and is just beginning its international journey. It opened its first store in China last year and already has five in that region, and it opens about 25 stores annually.
Amazon is a completely different story and a whirlwind of businesses. While its massive e-commerce business is what it built its company on and what it's known for, its cloud computing business, Amazon Web Services (AWS), has been a major growth driver and has been responsible for most of its profits in recent years. Its integration of generative artificial intelligence (AI) services into AWS as well as AI into e-commerce, advertising, and other areas of operation brings it into a new age and offers tremendous new opportunities.
It's a major player in streaming, and it's expanding its healthcare business as well. It's trying to ramp up the healthcare business, under the name of an acquired company, One Medical, and recently announced a benefit for Prime members to get access to the service for $99 annually.
Comparing stock gains
There's really no comparison with long-term stock gains, and Amazon has been a much more valuable stock to own over time than Costco, gaining about double Costco's return over the past 10 years.
However, Costco stock has gained more than Amazon stock over the past three- and five-year periods. Not only has Amazon been more volatile, but it trades at much higher premium than Costco. Accordingly, Amazon stock has more to lose when things go wrong.
AMZN PE Ratio data by YCharts
Costco pays a dividend, which Amazon doesn't. It doesn't yield a high rate, only 0.69%, but it pays a special dividend on occasion of between $5 and $10 that adds a lot of value to the total dividend.
Which stock is the better buy right now?
Based on all of this, it would seem that Amazon is the better buy. It generally reports higher sales growth, higher income, and a wider operating margin. It has also gained much more over the long term.
However, each of these stocks provides something different for a portfolio or for different investing styles. Amazon is a riskier stock that tends to go down in value when things go wrong, whereas Costco is also a market-beating stock with a lower valuation, more stability, and a growing dividend. Costco offers more for value investors, but many investors could consider buying both top stocks for a diversified portfolio.
