Chances are, if you’re an American, you have a membership in either Amazon (NASDAQ: AMZN), Costco Wholesale (NASDAQ: COST), or both. Each retailer has generated huge long-term profits for its shareholders, with Amazon dominating the online market and Costco thriving with its network of wholesale warehouses.
But which stock is the better buy right now? Let’s dive into their latest financial results, balance sheets and future growth opportunities to find out.
The top and bottom lines
For the first category, let’s look at two essential financial measures for any business: net sales and free cash flow.
Amazon generated net sales of $143.3 billion in the first quarter of 2024, compared to $127.4 billion in the same period a year ago, an increase of 12.5%. Looking ahead to Amazon’s second quarter 2024, management expected net sales between $144 billion and $149 billion, or an increase between 7% and 11%.
By comparison, Costco recently reported net sales of $57.4 billion during fiscal third quarter 2024, which represented a year-over-year increase of 9.1%. It is important to note that sales were positively impacted by a shift in the company’s fiscal calendar by approximately 0.5% to 1%. While Costco management does not have any forward-looking revenue guidance, the company does release its monthly net sales results ahead of earnings reports, which totaled $19.64 billion for the retail month of May, a year-over-year increase of 8.1% from $18 ,16. billion.
Turning our attention to each company’s profitability, Amazon generated $46.1 billion in free cash flow in the trailing twelve months, a significant improvement from -$10.1 billion in the trailing twelve months ended March 31, 2023. Ter Comparison: Costco generated $7.4 billion in free cash flow over the trailing twelve months, a 10% improvement compared to the trailing twelve months ended May 7, 2023.
Overall, Costco’s recent financials are solid and stable; However, Amazon wins in this category because the stock’s revenue and profitability growth are more impressive.
Financial health and capital return to shareholders
A company’s balance sheet is a crucial snapshot that illustrates its financial health. The balance sheets of both Amazon and Costco show financial stability without debt. Specifically, Amazon has $27.4 billion in net cash (cash and cash equivalents minus total debt) compared to Costco’s $4.6 billion in net cash.
At a time when interest rates are relatively high, both Amazon and Costco can avoid a debt snowball effect due to high interest charges. Instead, the companies can operate from a position of strength and, according to Costco, return capital to shareholders through dividends, allowing shareholders to reinvest their money in the company or collect money themselves.
Costco currently pays a regular quarterly dividend of $1.16 per share, which equates to an annual yield of 0.6%, which at first glance may not impress income-seeking investors. However, the company is known for regularly paying special cash dividends – five in the last eleven years – with the most recent coming in January 2024.
Amazon currently does not pay a dividend and it is unlikely that other tech giants will follow suit Alphabet And Metaplatforms, which recently announced its plans to pay dividends for the first time. During Amazon’s most recent earnings call, CFO Brian Olsavsky stated that the company had no news to report on dividends. He emphasized that management’s top priority is investing in growth opportunities and long-term initiatives. These investments are focused on generative artificial intelligence (AI), which is expected to drive capital investments higher in 2024 than the previous year’s $48.4 billion.
So despite Amazon’s slightly stronger cash position, this category goes to Costco because of its consistent track record of returning capital to shareholders and the high likelihood that Amazon will continue to do so.
Growth opportunities
While both stocks have been outperforming for quite some time, potential buyers should focus more on each company’s future growth potential.
As indicated, Amazon sees its next phase of growth in generative AI, with plans to implement it in virtually every sector of the business. One division already benefiting is Amazon Web Services (AWS), which helps companies build AI products and services. As a result, AWS’s growth rate is “accelerating” to a projected annual revenue of $100 billion, up from $90.8 billion in 2023.
While the AI ​​market is still in its infancy, Statista, a global data and business intelligence platform, predicts exponential growth. Specifically, Statista estimates the AI ​​market to reach $184 billion in 2024, with an expected annual growth rate of 28.5%, resulting in a market volume of $827 billion in 2030.
By comparison, Costco has two main growth drivers: international expansion and rising membership fees. At the end of the third quarter of 2024, the company had 876 locations, 752 of which were in North America. Management aims to open a net 25 to 30 new locations each year, with the most expansion potential in China. Since opening its first China warehouse in 2019, Costco’s membership has increased to approximately 200,000 in the second fiscal quarter of 2024 and it recently opened a seventh location. Notably, Amazon closed its online marketplace in China in 2019 and has yet to return.
Second, Costco has a history of increasing membership dues approximately every five years, with the last increase coming in 2017. With a base of 74.5 million members contributing approximately $4.8 billion in high-margin revenue, even an increase would of the $5 contribution can make an additional contribution. $372 million per year.
When asked about increasing membership prices during the company’s last earnings call, Costco CFO Gary Millerchip said it’s “still a matter of when we increase the fee, rather than if we increase the fee.” “
Overall, both companies are well positioned for future growth, each taking a different approach. Costco wants to grow slowly and steadily, while Amazon wants to expand at breakneck speed. Given Costco’s more secure growth, this category is close, but let’s reward Amazon for its higher growth potential.
Is Amazon or Costco the Better Buy?
Amazon and Costco are exceptionally well-managed companies that are poised for long-term success and worthy of any investor’s portfolio. That said, Amazon appears to be the better buy right now, especially when you consider its valuation. Amazon trades at a valuation of 42.8 times free cash flow, lower than the 10-year median of 62.9. For comparison, Costco currently trades at 50.5 times free cash flow and its 10-year median is 31.1 times free cash flow.
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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. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Collin Brantmeyer has positions in Amazon, Costco Wholesale and Microsoft. The Motley Fool holds positions in and recommends Amazon, Costco Wholesale, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Best Stocks to Buy Now: Amazon vs. Costco was originally published by The Motley Fool
