Amazon vs. Costco: Which Stock Is the Better Buy Right Now?

Amazon (NASDAQ: AMZN) and Costco (NASDAQ: COST) are among the largest players in their respective industries, and both have delivered market-beating returns over the long run, though Amazon has done significantly better. However, the e-commerce specialist is now worth $2.7 trillion, more than five times Costco's market cap. Does Amazon still have enough upside left at its size, or should investors opt for the smaller Costco? Let's see which of these two stocks is more attractive.

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The case for Amazon

Amazon has a vast, diversified business spanning e-commerce, digital advertising, cloud computing, video and music streaming, and other things. The company is a leader in practically every major industry it operates in, and most of them still have significant long-term potential. Consider e-commerce. As Amazon's CEO, Andy Jassy, recently said in a letter to shareholders, 80% of retail transactions still occur in brick-and-mortar stores. That will likely change over the long run, and Amazon is well-positioned to capitalize on it. The company is similarly looking at a massive addressable market in cloud computing.

Further, Amazon is pursuing initiatives to reduce costs and improve margins. The company is increasingly relying on industrial robots in its warehouses, for instance, something that can help improve efficiency. Meanwhile, Amazon's rapidly growing advertising business should also elevate its margins in the long run. Lastly, Amazon generates significant free cash flow and benefits from competitive advantages across multiple sources. The company's deep ecosystem displays high switching costs and network effects, while its brand name also effortlessly attracts e-commerce customers. Amazon may be worth over $2 trillion, but the stock still has upside left for investors willing to be patient.

The case for Costco

Costco is one of the largest retailers in the U.S. It offers relatively low prices by selling items in bulk and allowing customers to stock up for a while. One of the company's strengths is its membership model. Once shoppers sign up, they have an incentive to keep shopping at Costco. Otherwise, they are wasting money on their subscription fees. Costco has also adapted to modern demands, even as other legacy brick-and-mortar stores have been left behind. The company has a booming, fast-growing e-commerce business that helps push its top-line growth in the right direction.

It is also helping fuel Costco's advertising business, which has performed well in recent years. Costco should remain a leader in retail as it expands its footprint, thanks to its ability to offer competitive prices and its membership model, which creates switching costs and generates recurring, high-margin revenue. Lastly, Costco is an excellent dividend stock. Even with a low forward yield of 0.6%, Costco has raised its payouts annually for over 20 consecutive years.

Costco's cash payout ratio of 27.9% also suggests it has ample room for additional dividend hikes. A robust dividend program like Costco's may be particularly attractive to many investors right now.

The verdict

Amazon generates higher revenue and profits. Yet it also generally grows its top line faster than Costco. And on top of that, Amazon's shares look much more reasonably valued right now.

AMZN Revenue (Annual) data by YCharts

Is there any reason to choose Costco over Amazon? Perhaps. Costco could provide some stability in these volatile times. Amazon's cloud and advertising businesses -- which are responsible for much of its operating profits -- could suffer in a recession, leading investors away. We aren't in a recession yet, but given recent developments, some experts are warning it could happen soon, and if it does, Amazon could suffer. Costco should do comparatively better, given its ability to consistently offer low prices in its core business.

Costco is also a clearly better pick for income seekers, since Amazon currently doesn't pay dividends. The bottom line: The choice between these two companies right now may come down to each investor's preferences. Growth-oriented ones should opt for Amazon, but others seeking a reliable dividend payer as a safe haven in challenging times should go with Costco.

Prosper Junior Bakiny has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Costco Wholesale. The Motley Fool has a disclosure policy.