Amazon vs. Costco: Which Retail Stock is a Better Buy?

Costco Wholesale Corporation (COST), which is headquartered in Issaquah, Wash., operates an international chain of membership warehouses and offers merchandise at substantially lower prices than are typically found at conventional wholesale or retail sources. In comparison, e-commerce giant Amazon.com, Inc. (AMZN) in Seattle, Wash., engages in the retail sale of consumer products and subscriptions internationally. It operates through three segments: North America; International; and Amazon Web Services.

Investors’ concerns over the pace of economic recovery due to the resurgence of COVID-19 cases and high inflation have made the markets volatile. However, several retail companies have strengthened their digital presence. Also, most retailers are dealing with inflation by passing on higher costs to their customers through price hikes. Furthermore, the gradual revival of foot traffic in retail stores with the economy’s reopening should support retailers' growth. According to a Research and Markets report, the global retail market is expected to grow at a 7.7% CAGR between 2020 - 2025.

COST has gained 20.7% in price over the past three months, while AMZN has returned 8.1%. Also, COST’s 21.2% year-to-date gain is higher than AMZN’s 6.8% returns. And, in terms of their past six months’ performance, COST is the clear winner with 37.6% gains versus AMZN’s 10.6% returns.

Click here to checkout our Retail Industry Report for 2021

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

COST and Uber Technologies, Inc. (UBER) entered a delivery pilot in July 2021, with 25 locations across Texas where COST’s members could have their groceries delivered within hours, if not minutes, with UBER’s UberEats. COST’s Executive Vice President, Merchandising, Ron Vachris, said, “By finding solutions to deliver merchandise quickly and efficiently, we continue to offer our members value, convenience and member service.”

There  is speculation that AMZN will  open large retail locations that resemble department stores. Its first  department stores are expected to be in California and Ohio.

Recent Financial Results

COST’s net sales increased 21.7% year-over-year to $44.38 billion for its  fiscal third quarter, ended May 9, 2021. Its operating income grew 41% year-over-year to $1.66 billion, while its net income increased 45.6% to $1.22 billion. The company’s EPS increased 45.5% year-over-year to $2.75.

AMZN’s net sales increased 27% year-over-year to $113.10 billion for the second quarter, ended June 30, 2021. Its operating income grew 32.7% year-over-year to $7.70 billion, while its net income increased 50% year-over-year to $7.80 billion. Also, its EPS came in at $15.12, up 46.8% year-over-year.

Past and Expected Financial Performance

COST’s revenue and EPS have grown at CAGRs of 10.2% and 15.9%, respectively, over the past three years. Analysts expect COST’s revenue to increase 15.8% in its fiscal 2021 and 7.2% in fiscal 2022. The company’s EPS is expected to grow 21.7% in its fiscal 2021 and 9.6% in fiscal 2022. And  its EPS is expected to grow at a 10.6% rate  per annum over the next five years.

In comparison,  AMZN’s revenue and EPS have grown at CAGRs of 28.7% and 65.6%, respectively, over the past three years. The company’s revenue is expected to increase 23.3% in its fiscal 2021 and 18.3% in fiscal 2022. Its EPS is expected to grow 27.3% in its fiscal 2021 and 25.4% in fiscal 2022. In addition, AMZN’s EPS is expected to grow at a 35.8% rate  per annum over the next five years.

Profitability

AMZN’s trailing-12-month revenue is 2.37 times COST’s. AMZN is also more profitable with gross profit  and net income margins of 40.68% and 6.64%, respectively, compared to COST’s 13.07% and 2.53%.

However, COST’s 7.97% and 15.26% respective ROA and ROTC compare with AMZN’s 5.99% and 9.19%.

Valuation

In terms of forward non-GAAP P/E, AMZN is currently trading at 65.39x, which is 53% higher than COST’s 42.73x. And  AMZN’s 3.76x forward EV/S  is 261.5% higher than COST’s 1.04x.

So, COST is the more affordable stock.

POWR Ratings

COST has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, AMZN has an overall C rating, which translates to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Both COST and AMZN have a grade of B for Sentiment, consistent with their favorable analyst sentiment.

Moreover, COST has a B grade for Stability, which is in sync with its 0.64 beta. However, AMZN has a C Stability grade, which is  in sync with its 1.14 beta.

Of the 40 stocks in the A-rated Grocery/Big Box Retailers industry, COST is ranked #14. However, AMZN is ranked #21 of 75 stocks in the F-rated Internet industry.

Beyond what we’ve stated above, we have also rated the stocks for Quality, Momentum, Value, and Growth. Click here to view all the COST ratings. Also, get all the AMZN ratings here.

The Winner

Despite the resurgence of COVID-19 cases, the retail industry is well-positioned to grow, benefiting both COST and AMZN. But we think COST is the  better buy now because of its lower valuation and higher stability.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Grocery/Big Box Retailers industry here. Also, click here to access all the top-rated stocks in the Internet industry.

Click here to checkout our Retail Industry Report for 2021

COST shares were trading at $459.67 per share on Thursday afternoon, up $3.15 (+0.69%). Year-to-date, COST has gained 22.73%, versus a 22.05% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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