Best Stock to Buy Right Now: Costco vs. Walmart

Retail giants Walmart (NYSE: WMT) and Costco Wholesale (NASDAQ: COST) have a lot in common. People go to these shopping hubs when budgets are tight. Actually, Walmart and Costco stay busy in any economy -- and despite their low-cost products and services, these companies make money by the truckload.

Look up "consumer defensive" stocks in your favorite screener and sort the list by market cap. Walmart tops that list with a $734 billion market value on Dec. 27, followed by Costco at $415 billion. I'm talking about true business titans here.

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But should you buy Costco or Walmart stock today? You know how similar these companies can be, but let's check out how they differ, too.

Retailer rockets in 2024

Both stocks have soared in 2024. Costco shares gained more than 41% this year, and Walmart investors saw a 73% share price increase.

These stodgy old value stocks are behaving more like high-growth names from the tech sector. Walmart shares are trading at price-to-sales (P/S) ratios not seen in more than 20 years, and Costco's P/S valuation has never been this rich before.

WMT PS Ratio data by YCharts.

The growth gap narrows

Costco used to grow its sales much faster than the retail giant from Arkansas. Costco's revenues rose 46% in the three-year period from fiscal year 2019 to 2022. Walmart's top-line growth stopped at 14.5% over that time span.

But things have changed, and the two companies have shown very similar sales growth in the last two years.

WMT Revenue (TTM) data by YCharts.

Here's an unexpected AI leader

Walmart's accelerated growth comes from a surprisingly high-tech setup. In the latest earnings call, Walmart's leaders highlighted growing e-commerce operations in places like Mexico and a growing reliance on artificial intelligence (AI) tools.

"[W]e're learning and applying generative AI, AI, and machine learning to solve the practical opportunities right in front of us," said Walmart CEO Doug McMillon. One generative AI tool is helping Walmart's staff access the proprietary business data they need. A customer-facing shopping assistant with machine learning smarts has been in beta testing since the summer, and should soon become widely available.

E-commerce is also a large part of Costco's business plan, but the company appears to have fewer AI projects going on. Costco leaders haven't mentioned AI in a financial call since last spring, when (now retired) CFO Richard Galanti said that the company was in "early innings" of putting this technology to use.

I'm almost shocked to see Walmart taking advantage of new technology faster than Costco. It can't be easy to drive that massive business in a new direction, given the unyielding law of large numbers. But that's what I see happening today.

Great stocks, bad timing

So Walmart is keeping up with Costco's business growth, with assistance from a promising set of AI tools. At the same time, the retail giant's stock is less expensive than Costco's across a wide range of valuation metrics.

But that doesn't make Walmart's stock a slam-dunk buy today. With a price-to-earnings ratio (P/E) of 37.5 and price-to-free cash flow (P/FCF) of more than 43, even Walmart's lower-priced stock looks quite expensive.

This malaise extends beyond Costco and Walmart. With a couple of exceptions, the entire category of discount-priced retail stores has enjoyed stellar market performance this year -- leaving their stocks stranded at very lofty valuation ratios. This secular trend makes sense, since people have been dodging inflation since the summer of 2021. Low-priced goods are worth their weight in gold these days.

Yes, I'd rather buy Walmart stock than Costco shares at the moment. But even Walmart is more of a "hold" recommendation than a flat-out "buy" idea. This just doesn't look like the right time to start a position in most discount-store stocks.

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Anders Bylund has positions in Walmart. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy.