The best stock to buy right now: Amazon vs. Costco

Amazon (AMZN -1.34%) and Costco Wholesale (COST -2.29%) they are two of the best retail stocks on the market. Both are surefire winners that have beaten the market by a wide margin over the decades. But if you could only buy one today, which is the best buyer?

The case for Amazon: unlocking new opportunities

Amazon is the second largest company in the US by sales and the fourth largest by market capitalization. It has nearly 38% of the e-commerce market share in the US and 31% of the cloud services market share globally. It’s a major player in streaming, has a fast-growing advertising business, and has plenty of other new ideas on the stove.

If that weren’t enough, he still sees massive opportunities ahead — particularly in generative artificial intelligence (AI). The average person thinks about or uses generative AI for fun, to learn information easily, or to generate content that fulfills obligations. Workers use generative AI to generate all kinds of consumable content.

But developers, such as those who code for websites, can use generative AI to efficiently manage non-creative work and free up their time for tasks that require human analysis. Amazon targets all types of usage tasks with its generative AI solutions for Amazon Web Services (AWS).

CEO Andy Jassy goes on to say that 90 percent of the company’s information technology (IT) spending is still on-premise, meaning not in the cloud. This is a wide open opportunity in an area where Amazon has a clear advantage and is not giving up on innovation to maintain its lead and benefit from the opportunity. Its AWS-AI business already has a $105 billion run rate, and management sees this as early days.

Until now, migrating to the cloud has been a lot of work for customers, but AI is making it much easier, and the migration plus the new infrastructure built on the cloud should lead to faster growth.

Amazon is still refining its e-commerce business, lowering costs and making it the platform of choice for its 200 million Prime members at even higher rates. It also uses its unrivaled e-commerce platform to run a large advertising business. There are many levers that Amazon can push to achieve higher sales and profits in the near future.

The Case for Costco: The Reliable and Profitable Fee Model

Costco sells many of the same things as Amazon, but retail is the only business. You could say, though, that what Costco really sells is warehouse memberships, because that’s how they make the most money. It’s a model that works wonderfully, with customers getting cheap prices, generating high volume and sales, and introducing a cycle of renewals. There are other retailers that use this model, but none are as large or popular as Costco.

At the end of its fiscal third quarter (ended May 12), Costco had 133.9 million cardholders worldwide, up 7.4% year over year. Revenue from membership fees rose 7.6% to $1.1 billion. Net income totaled $1.7 billion, and since membership fee income goes directly to the bottom line, it’s clear that it’s a large portion of net income.

The renewal rate in the US and Canada was an impressive 93% and the global rate was 90.5%. Costco does well at all times, but is more resilient than other retailers when there is inflation because every dollar counts a little more. Shoppers looking for better deals are more likely to keep their memberships and shop at Costco more than other stores, even if they buy items at lower prices.

Costco stock is reliable for market gains and also pays a growing dividend. The dividend yield is typically not very attractive, yielding 0.61% at the current price. But it occasionally pays a special dividend that is quite attractive. It has been paid out every two to three years or so since 2012, and the most recent one, issued in December, was the highest ever at $15.

Costco has received a lot of attention this year for its latest special dividend and news of a tax increase, its first in seven years. There is little chance that this will negatively affect renewal rates and cardmember enrollments. Not only will most members easily recoup the extra $5 (or $10 for executive members) in savings by shopping at Costco stores, but management uses the extra cash to bring greater value to shoppers.

One of these stocks works for you

This is a tough contest as these are each fabulous stocks and I recommend them both. Both can be part of a diversified portfolio because each offers something different, with the opportunities of Amazon and the passive income and reliability of Costco. If you can only buy one, the growth investor might choose Amazon, while the retiree or dividend investor might choose Costco.

AMZN PE report data by YCharts.

But I won’t give up on the question. If I had to pick a stock today, I’d go with Amazon. It has incredible long-term opportunities and its track record is strong and consistent enough even for the value investor. Plus, it’s trading at a cheaper valuation than Costco today, making now a great time to buy.