How are they today?
Both Costco and Amazon experienced strong sales growth early in the coronavirus pandemic, and both are seeing slowdowns in the current inflationary environment.
In the third quarter of 2022, Amazon's sales increased by $151,000 year-over-year; meanwhile, Costco's sales increased by $8,11,000 year-over-year in the first fiscal quarter of 2023 (ended November 20). Amazon reported a net profit of $2.9 billion in the third quarter, compared to $3.2 billion in the same period last year, and Costco's net profit increased from $1.32 billion in the first fiscal quarter of 2022 to $1.36 billion in the first quarter of 2023.
Amazon is a much larger company, both in terms of sales and the businesses it operates. Amazon's core business is retail e-commerce, but Amazon Web Services has become a significant part of the company, and it operates several other businesses, such as its devices unit and its just-walk-out technology. It also recently acquired MGM Studios and equipment manufacturer iRobot.
Costco maintains its warehouse membership shopping club model even after it has grown from a supermarket chain to offer everything from full-service travel to designer clothing and a hearing aid clinic.
What can we expect this year?
Amazon started the year by cutting 18,000 jobs, like many tech companies that have already passed the boom. It already began cutting costs months ago, after expanding to meet the pandemic-fueled acceleration in demand. Management is targeting a $1.5 trillion year-over-year increase in sales by mid-Q4 2022, a significant slowdown, and operating income of $1.4 trillion to $1.4 trillion. Amazon is trying to weather this difficult time by continuing to improve the customer experience and adjusting its infrastructure to accommodate slower demand.
Costco has been addressing supply chain issues by developing its own supply chain, and while this has helped it with faster response times and lower costs, it is addressing some of these issues now that overall supply chain headaches have subsided. Costco does not provide quarterly guidance. Management noted that inflationary pressures eased in the first quarter, although that quarter showed a real slowdown in sales growth, which should reflect positively in future quarters.
Costco typically fares well in a recession, offering some of the lowest prices available. Its membership renewal rates have remained consistent at around 90%, which is fairly consistent in any operating environment.
What can we expect in the long term?
Over time, all of these trends are likely to continue. Amazon is investing in all kinds of businesses driven by the massive amount of e-commerce sales it generates. Some of them don't work out, but many do, and they could become essential growth drivers for the business as a whole. We may not see the benefits quickly if we end up in a recession this year, but Amazon continues to dominate the retail landscape, and its stock should rebound when the economy improves.
Costco is expanding slowly, but in the long run, it's unlikely to see major changes to its model. By opening new stores, it will increase sales and generate more revenue. Renewal rates should be consistent, and Costco will likely add millions of customers each year, as it almost always does.
You can get a sense of the two companies' different models by looking at their operating margins. Amazon's operating margin has been much higher and lower. Costco is quite similar, regardless of the operating environment.
COST Operating Margin (TTM) data from Y-charts
Valuation and dividends
Amazon has always been an expensive stock in terms of valuation. When it split its stock last summer, the price per share fell from about $1,000 to about $1,000. But its price-to-earnings (P/E) ratio during that period was nearly as cheap as it was before, when it fell to about 50. It's still expensive compared to the P/E ratios of most other stocks. Costco is also considered expensive, trading at 37 times trailing 12-month earnings. It also commands a premium for delivering reliable growth and revenue.
Amazon doesn't pay dividends; these are typically older stocks that have passed their high-growth phase and are focused on generating cash that pays dividends. Costco pays a dividend that yields just 0.7% at its current price, but it also pays an occasional special dividend that catapults it to the big leagues.
Put it all together
Usually, when I compare two titles, one is clearly more compelling than the other, even if they're both very good titles. I don't see that here.
Amazon and Costco stocks offer incredible benefits for shareholders, in my opinion. It just depends on what you're looking for in an investment. Amazon has enormous potential in new businesses and offers high growth potential. Costco is slower-paced, with stability and dividends, as well as strong growth prospects, making it incredibly valuable.
I recommend these two stocks as excellent options in a diversified portfolio.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, serves on The Motley Fool's board of directors. Jennifer Saibil holds no position in any of the stocks mentioned. The Motley Fool has locations and recommends Amazon.com, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.
