Costco(NASDAQ:COST) is arguably one of the best mega-cap retail stocks that investors shouldn’t think twice about buying into dips. Shares are currently in the midst of a correction, and while valuation is a concern for many, I still view the latest pullback as more of a golden opportunity to load up the shopping cart than a sign that it’s time to exit before a more painful rollover and valuation reset.
Key Points
- Costco is a fantastic retailer to hang onto, given its incredible value proposition.
- However, if a K-shaped economy leads to weaker employment and a more challenged consumer, my money would be on Walmart.
- Walmart’s already larger than Costco, and I think it’ll stay that way in five years’ time, thanks to its AI advantage and relentless focus on rolling back prices.
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Costco’s a must-own on weakness
Indeed, Costco is firing on all cylinders, with its amazing value proposition and the new addition of high-demand goods, which I outlined in prior pieces (most notably gold and now weight-loss drugs Ozempic and Wegovy). If the macro environment becomes more challenging in a potential K-shaped economy, whereby some corners of the market (those closely tied to the AI boom) are booming while others are experiencing pressure, I think Costco is poised to continue doing well.
Arguably, it’s a stealth AI play, not only because it’s adopting next-generation AI technologies to improve its operations and give members an even better experience, but because it’s a source of competitively-priced products in a climate where the consumer could continue to gravitate towards value as the theme of tech layoffs and automation continues to play out.
As long as Costco continues to provide more value for members than the annual cost of membership, I see the firm continuing to thrive, especially as we enter an era where the economy is either red-hot or ice-cold based on the sector you’re looking at.
Either way, Costco stands out as one of those must-own consumer staple stocks to hang onto for extended periods of time. Of course, time will tell what’s to happen with Costco stock next. Either way, the $414 billion warehouse retail juggernaut seems like the retailer to beat. However, there are names in the space that I think can stand out as the battle to offer a better value continues in an era where employment could take an even larger hit.
Prediction: Walmart will stay larger than Costco in five years
In terms of value propositions, it’s tough to match the one provided byWalmart(NYSE:WMT). It offers low costs without requiring one to purchase an annual membership. And if the employment situation gets really bad, I think we could see Walmart continue to take market share across the board, including from the likes of Costco.
Now, there’s no denying that a Costco membership more than pays itself off for most customers. However, if the budget gets really tight, perhaps a membership will be less justifiable, especially if affordability becomes the most important factor.
In any case, I think Walmart will grow its lead over the likes of Costco in the next five years, as the firm continues investing heavily in AI efforts and its e-commerce platform. The company’s AI chatbots and increased automation in the warehouse (as well as with delivery trucks) could allow Walmart to pass even more value back to its customers. Indeed, there’s a lot of margin gain to be had by automating a growing part of logistics and the supply chain.
However, I think Walmart has a unique opportunity to get aggressive with price rollbacks (maybe it’ll help push for massive food price disinflation in the next three years), perhaps giving it an edge over rivals.
The bottom line
Though Costco’s purchasing power is profound, I think Walmart’s AI edge could allow it to not only stay ahead in the retail race but to push further ahead over the next five years. At a more palatable 33.6 times forward price-to-earnings (P/E), I consider WMT shares to be a top pick in retail for investors with a five-year horizon or more. As we head into 2026, I expect Walmart to become a $1 trillion company as the firm harnesses the full power of AI.