Costco (COST 0.49%) and Amazon (AMZN 6.19%) are two of the world’s most resilient retailers. Costco’s warehouse stores attract a lot of shoppers with its bulk discounts, and it locks them in with its paid memberships. Amazon is the world’s largest e-commerce company, and it maintains a wide moat by providing steep discounts, cheap shipping options, and more perks to over 200 million Prime members worldwide.
Costco’s focus on bulk purchases, sticky memberships, and constant brick-and-mortar expansion in the U.S. and overseas markets shielded it from Amazon’s growth as other brick-and-mortar retailers retreated. Amazon also leveraged its cloud business’ higher-margin revenues to subsidize the expansion of its lower-margin e-commerce business — and that unique strategy gave it an edge against many of its brick-and-mortar retail competitors.
Image source: Getty Images.
Over the past three years, Costco’s stock soared 80%, as Amazon’s stock only advanced 13%. Let’s see why the wholesale retailer outperformed Amazon by such a wide margin — and if it will remain the better buy for the foreseeable future.
Why did the bulls love Costco?
Costco’s long-term expansion has been mainly driven by its new store openings, steady comparable sales, growth in cardholders, and high renewal rates. It’s consistently checked all four of those boxes from fiscal 2020 to fiscal 2024 (which ended this September).
|
Metric |
FY 2020 |
FY 2021 |
FY 2022 |
FY 2023 |
FY 2024 |
|---|---|---|---|---|---|
|
Total store count growth (YOY) |
1.5% |
2.8% |
2.6% |
2.7% |
3.5% |
|
Comparable sales* growth (YOY) |
9.2% |
13.4% |
10.6% |
5.2% |
5.9% |
|
Cardholder growth (YOY) |
7.1% |
5.8% |
6.5% |
7.6% |
7% |
|
Worldwide renewal rate* |
88.4% |
88.7% |
90.4% |
90.4% |
90.5% |
Data source: Costco. *Excluding gas and foreign exchange. YOY = Year-over-year.
From fiscal 2020 to fiscal 2024, Costco’s revenue grew at a compound annual growth rate (CAGR) of 11% as its EPS rose at a CAGR of 16%. Its growth accelerated in fiscal 2021 and fiscal 2022 as the pandemic drove more people to stock up on packaged foods and consumer staples, but it continued growing over the following two years, even as inflation curbed consumer spending. It also recently raised its membership fees for the first time in seven years to offset that pressure.
Costco’s growth rates aren’t jaw-dropping, but its resilience, scale, and stickiness make it a good safe-haven investment. From fiscal 2024 to fiscal 2027, analysts expect its revenue and EPS to rise at a CAGR of 7% and 10%, respectively. That outlook is stable, but its stock looks a bit pricey at 50 times this year’s earnings.
Why was the market less enthusiastic about Amazon?
Amazon generates most of its revenue from its e-commerce marketplaces, but it reaps most of its profits from its Amazon Web Services (AWS) cloud platform. Its e-commerce and cloud businesses both grew rapidly in 2020 and 2021 as the pandemic drove more consumers to shop online and more companies to upgrade their cloud infrastructure.
|
Metric |
2020 |
2021 |
2022 |
2023 |
1H 2024 |
|---|---|---|---|---|---|
|
North America sales growth (YOY) |
38% |
18% |
13% |
12% |
11% |
|
International sales growth (YOY) |
40% |
22% |
(8%) |
11% |
8% |
|
AWS sales growth (YOY) |
30% |
37% |
29% |
13% |
18% |
|
Total sales growth (YOY) |
38% |
22% |
9% |
12% |
11% |
Data source: Amazon.
But in 2022, both of Amazon’s growth engines sputtered out as the pandemic-induced tailwinds dissipated, inflation curbed consumer spending, and rising rates drove many companies to rein in their cloud expenses. It also turned unprofitable for the full year as its big investment in the struggling EV maker Rivian backfired.
Over the past one and a half years, Amazon’s growth stabilized as the macro environment warmed up again. Its e-commerce business recovered as it prioritized faster deliveries, sold more everyday essentials, and expanded into more countries. AWS’ growth accelerated again as more companies upgraded their cloud infrastructure to handle the soaring usage of new generative AI applications.
From 2023 to 2026, analysts expect Amazon’s revenue and EPS to grow at a CAGR of 11% and 35%, respectively, as its near-term headwinds dissipate. Based on those expectations, its stock still looks reasonably valued relative to its growth at 33 times next year’s earnings.
The better buy: Amazon
Costco had a great run, but its valuations have gotten ahead of its growth rates. Therefore, I believe that Amazon — which was broadly underappreciated over the past three years — could have more upside potential than Costco over the next three years as the macro environment finally improves.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun 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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