The Retail Titans: Costco vs. Amazon
Costco (NASDAQ: COST) and Amazon (NASDAQ: AMZN) are two of the world’s leading retailers. Costco draws shoppers with its bulk discounts and pays them by offering paid memberships. On the other hand, Amazon stands as the largest e-commerce platform globally, attracting over 200 million Prime members with impressive discounts, affordable shipping, and various benefits.
While Costco has expanded its warehouse stores, benefiting from consistent membership retention and limited competition from traditional retailers, Amazon capitalized on its cloud business’ profitability to support its lower-margin e-commerce operations. This strategic advantage allowed Amazon to outperform many of its brick-and-mortar counterparts.
Image source: Getty Images.
Over the last three years, Costco’s stock has grown by 80%, in stark contrast to Amazon’s 13% increase. This raises the question: what has driven Costco’s success and can it sustain its edge going forward?
Costco: The Bull’s Favorite
Costco’s robust expansion strategy largely stems from its steady store openings, consistent comparable sales, a growing cardholder base, and a high membership renewal rate. The company’s performance over fiscal years 2020 through 2024 reflects strong progress in all these areas.
|
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 increased with a compound annual growth rate (CAGR) of 11%, while its earnings per share (EPS) rose at a CAGR of 16%. Growth surged during the pandemic years of 2021 and 2022 due to heightened demand for packaged food and essentials, continuing even as inflation impacted consumer spending. The retailer also recently raised its membership fees for the first time in seven years to maintain its financial health amidst economic challenges.
Although Costco’s growth metrics may not seem astronomical, its business stability and scaling power suggest it remains a solid investment choice. Going forward, analysts predict a CAGR of 7% for revenue and 10% for EPS through fiscal 2027. However, the stock’s current valuation seems high at 50 times this year’s earnings.
Amazon: The Market’s Diminished Excitement
Amazon primarily earns its revenue through its e-commerce platforms, but its profits heavily rely on its Amazon Web Services (AWS) cloud business. In 2020 and 2021, both segments experienced significant growth as the pandemic changed consumer shopping patterns and prompted businesses to enhance their cloud capabilities.
|
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.
However, in 2022, Amazon faced challenges as growth slowed in both key sectors. The initial pandemic boost faded, inflation took a toll on consumer purchasing power, and increasing interest rates prompted many firms to cut back on cloud spending.
Amazon’s Financial Recovery Signals New Investment Opportunity
Despite challenges with cloud expenses and a major loss from its investment in Rivian, Amazon is managing to stabilize and regain momentum in its growth.
Amazon Shows Signs of Recovery
In the past year and a half, Amazon has seen its growth stabilize as the economy improves. The company’s e-commerce segment rebounded as it focused on faster delivery times, expanded its range of everyday products, and increased its presence in new countries. At the same time, Amazon Web Services (AWS) has experienced renewed growth, with many businesses updating their cloud systems to support the rise in demand for generative AI technology.
Looking ahead, analysts predict that from 2023 to 2026, Amazon’s revenue and earnings per share (EPS) will grow at compound annual growth rates (CAGR) of 11% and 35%, respectively. Given this potential, the stock appears reasonably priced at 33 times next year’s forecasted earnings.
Why Amazon Might Be a Smarter Investment Than Costco
Although Costco has enjoyed strong performance recently, its stock valuations have outpaced its growth. In contrast, Amazon, which has not received as much recognition over the past three years, may offer greater upside potential as the economic landscape improves.
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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.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
