Key Points
Costco and Walmart rule the retail industry, each with its distinct business model.
Walmart branched out into e-commerce, advertising, and memberships but faces steep competition from Amazon.
Costco can still tap into its loyal members for long-term growth, but the stock is very expensive right now.
- 10 stocks we like better than Costco Wholesale ›
If you want to invest in the American consumer, look no further than Costco Wholesale (NASDAQ: COST) and Walmart (NASDAQ: WMT). These two behemoths combine for more than $1 trillion in annual revenue and sit at the very top of a ruthlessly competitive retail industry.
Want to choose one to buy and hold forever? Frankly, choosing between them is like picking your favorite child. Both of these powerhouse retail stocks have brought joy and wealth to countless shareholders over the years.
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But there are some very important differences between them. This decision came down to the slimmest of margins, but ultimately Costco Wholesale stands out just a bit more. Here’s why buy-and-hold investors might opt for Costco over Walmart and one big catch that you don’t want to miss.
Image source: The Motley Fool.
Costco: The membership machine with a loyal following
Costco’s stores are huge warehouses and require a membership to shop there. Costco sells most products in bulk sizes, and it has become famous for its loss-leader products, such as its $1.50 hot-dog meal combo. Costco’s membership fees are practically all profit, which enables the company to sell goods at very thin profit margins.
Shopping at Costco is also an experience, which is an underrated aspect of the business. Costco spends no money on advertising. A quick social media search will show countless videos of people enjoying their latest Costco visit. Additionally, Costco tends to attract high earners who can pay more upfront for larger quantities to get more value per unit.
Walmart: The old-school retailer with some new tricks
On the other side is Walmart, which uses its huge size to source and sell goods at the lowest prices. Lower prices attract more customers, which gives Walmart greater scale, and that cycle has continued for decades, making it the world’s largest retailer. Today, roughly 90% of Americans live within 10 miles of a store. Many consumers do most of their shopping there, as every dollar counts, especially amid soaring living expenses.
The old-school retailer has had to adapt to competitive pressure from Amazon and other e-commerce companies. Walmart now has its own thriving e-commerce business, with five consecutive quarters of at least 20% growth. Walmart is also taking a page from Amazon’s playbook, growing a monthly subscription (Walmart+) and building an advertising business that’s beginning to move the needle on its bottom line.
Despite their different business models, Costco and Walmart are both top-notch retail stocks. Both stocks pay dividends and have outperformed the broader market over time.
Why Costco has a slight edge, with a big catch to know before you buy
Costco’s business is more straightforward and has yet to really pull its best growth lever — membership fees. Costco raised its membership fees in 2024 for the first time in nearly a decade. Plus, Costco shoppers seem to really enjoy the shopping experience, which has value that’s not always easy to quantify. In all, there’s probably still room to raise those membership fees over time.
Meanwhile, Walmart faces an escalating war with Amazon. The e-commerce giant is pushing hard into grocery, which is a major traffic driver for Walmart. This battle could continue for years, and Costco just doesn’t seem to face that direct competitive pressure. That gives Costco stock a slight edge if I had to choose between them.
But before you buy, there is a catch. The stock is just as popular as the company’s $1.50 hot dog meal. Costco trades at an eye-watering 49 times trailing-12-month earnings. High valuations aren’t necessarily bad if the growth justifies them. However, Wall Street analysts only see Costco growing earnings by an average of 9% to 10% annually over the long term.
Investors could see disappointing returns while waiting, potentially for years, for Costco’s business to catch up to the stock price. That might be fine if you’re holding the stock indefinitely, but it’s a point worth considering.
Should you buy stock in Costco Wholesale right now?
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.
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