Key Points
Costco (NASDAQ: COST) and Amazon (NASDAQ: AMZN) both have been winners for investors in recent years. The companies have strong track records of earnings growth, a loyal customer base, and strong competitive advantages. This has helped each of these stocks gain about 80% over the past three years.
So Costco and Amazon each represent fantastic long-term investments, ones you will want to keep in your portfolio for at least five to 10 years. These are true growth stock superstars. But what if you could only invest in one of them right now? Which of the two is the better buy? Let’s find out.
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The case for Costco
You probably have seen a Costco in or near your community, as the retailer has more than 900 warehouses worldwide. Most of them are in the U.S. and Canada, the company’s biggest markets.
One of the things I like most about Costco is its business model: The retailer generates revenue from you before you even start your shopping. This is through membership fees, which actually drive the company’s profit — that’s because membership is a high-margin business, involving very low costs for Costco. Importantly, membership renewals in the U.S. and Canada have surpassed 90% consistently quarter after quarter. So this is revenue — and eventually profit — that you can count on.
Costco is also generally a winner in any market environment since the company focuses on delivering rock-bottom prices to customers — and its strong sourcing network to deliver these prices is a clear competitive advantage.
As a result, even during economic downturns, customers may continue shopping more at Costco than at other retailers. It’s also important to note that Costco offers essentials like food and gas that keep customers coming back, even if their wallets are under pressure.
The case for Amazon
Amazon is another retailer that’s keenly focused on offering customers low prices — and that’s prompted them to return. The company’s worldwide e-commerce presence and Prime membership program represent strong competitive advantages that rivals would find hard to replicate. Prime offers customers advantages like fast delivery and access not only to shopping but also to entertainment, such as books and movies.
Like Costco, Amazon has what it takes to excel throughout economic environments, and the company’s broad fulfillment network is yet another competitive strength. In recent years, Amazon took steps to improve its cost structure — for example, shifting to a regional fulfillment model in the U.S. from a national one — and this should support earnings growth in the years to come.
Amazon is also winning in the artificial intelligence (AI) boom. The company uses AI to gain efficiency, and it’s a developer and seller of AI products and services through its Amazon Web Services (AWS) cloud computing business. This presence in AI has driven growth in recent years and is likely to drive more in the years to come, since we’re in the early days of the AI growth story.
Which is the better buy?
As mentioned, both of these stocks make great additions to a portfolio. Costco trades at a premium, as it generally does — but in recent times, valuation has come down. Amazon also has seen its valuation decline in recent weeks. Today, both are trading at reasonable levels.
AMZN PE Ratio (Forward) data by YCharts
Which is the better buy? This depends on your investment strategy. If you’re an investor who favors growth and doesn’t mind some risk, you may pick up a few shares of Amazon. I think Amazon’s long-term future is bright, and it’s demonstrated its revenue power in the AI market. But in recent weeks, concerns about the sustainability of tech spending on AI have weighed on AI stocks — if this pressure continues, the stock may slip in the near term.
Meanwhile, Costco, in an uncertain environment, may offer you more stability. And that’s why, in this growth showdown, Costco stock is the better buy for most investors.
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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.
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