Costco’s focus on bulk purchasing, steady membership subscriptions, and ongoing expansion of its brick-and-mortar stores in both the U.S. and international markets has allowed it to thrive while other retailers retreated in the face of Amazon’s growth. On the other hand, Amazon has leveraged the high-margin revenue from its cloud business to subsidize its low-margin e-commerce operations, giving it a competitive edge over many traditional retail competitors.
Stock Performance: A Tale of Two Retailers
Over the past three years, Costco’s stock has skyrocketed by 80%, while Amazon’s has seen a modest increase of just 13%. This stark difference in performance raises the question: why has the bulk retailer outperformed Amazon by such a large margin, and will it continue to be the better investment option in the near future?
Why Investors Favor Costco
Costco’s long-term growth is driven by several key factors, including new store openings, consistent same-store sales, increasing membership, and high renewal rates. The company has consistently checked all these boxes from fiscal year 2020 to fiscal year 2024 (ending this September).
Performance Metrics:
| 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% |
| Member Growth (YOY) | 7.1% | 5.8% | 6.5% | 7.6% | 7% |
| Global Renewal Rate* | 88.4% | 88.7% | 90.4% | 90.4% | 90.5% |
*Excluding gas and foreign exchange effects. YOY = Year Over Year.
From fiscal year 2020 to fiscal year 2024, Costco’s revenue grew at an 11% compound annual growth rate (CAGR), while its earnings per share (EPS) increased at a 16% CAGR. Although growth accelerated during FY 2021 and FY 2022 due to the pandemic driving consumers to stock up on packaged foods and staples, growth continued in the subsequent years despite inflationary pressures on consumer spending. To combat this, Costco recently raised its membership fees for the first time in seven years.
Costco’s growth rate is impressive, but its resilience, scale, and customer loyalty make it a safe investment. Analysts project that from fiscal year 2024 to fiscal year 2027, Costco’s revenue and EPS will grow at 7% and 10% CAGR, respectively. While this outlook is stable, Costco’s stock appears somewhat pricey, trading at 50 times this year’s earnings.
Why Market Enthusiasm for Amazon Has Dwindled
Amazon generates most of its revenue from its e-commerce marketplace, but it derives the majority of its profits from its Amazon Web Services (AWS) cloud platform. Both Amazon’s e-commerce and cloud businesses experienced rapid growth during 2020 and 2021, fueled by the pandemic, which encouraged more consumers to shop online and pushed businesses to upgrade their cloud infrastructure.
Performance Metrics:
| Metric | 2020 | 2021 | 2022 | 2023 | 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% |
However, in 2022, both growth engines faltered as the pandemic-induced tailwinds faded, inflation curtailed consumer spending, and rising interest rates prompted many companies to rein in their cloud expenditures. Amazon also faced headwinds from its substantial investments in struggling EV maker Rivian, which negatively impacted its profitability throughout the year.
Over the last 18 months, Amazon’s growth has stabilized as the macro environment warmed up again. Its e-commerce business rebounded as it prioritized faster delivery and expanded into more countries with everyday essential products. AWS growth also picked up again as more companies upgraded their cloud infrastructure to accommodate the increasing use of generative AI applications.
Analysts expect Amazon’s revenue and EPS to grow at 11% and 35% CAGR, respectively, from 2023 to 2026, as the near-term headwinds dissipate. Based on these expectations, Amazon’s stock appears fairly valued at 33 times next year’s earnings.
The Verdict: Costco’s Performance vs. Amazon’s Growth Potential
While Costco has delivered impressive results, its valuation has outstripped its growth rate. Therefore, it is believed that Amazon, which has been largely undervalued over the past three years, could see greater growth prospects than Costco over the next three years as the macro environment gradually improves.
With significant implications for both companies and their investors, the battle between these retail giants is one to watch as the market evolves.