Prediction: Costco Will Be Larger Than Walmart In 3 Years

As far as mega-cap retailers are concerned, Costco (NASDAQ:COST) and Walmart (NYSE:WMT) are the two big dogs in this sector most investors should be paying closest attention to. In the world of discount retail, Costco and Walmart stand heads and shoulders above the rest, with these companies often viewed as relative bellwethers for the overall economy.

There’s good reason for this. More than one-eighth of all retail sales take place annually at both companies combined. But despite Walmart’s market share eclipsing that of Costco, it’s also been true that the two companies’ market capitalizations have begun to converge over time, though they still remain rather far apart.

At the time of writing, Walmart stands tall at a market capitalization of $758 billion compared to Costco’s much smaller market cap of $432 billion. Accordingly, investors are going to need to see some major convergence to argue that Costco could make a run to top Walmart in the market capitalization category.

The thing is, Costco has been an incredible momentum stock in recent years. And while Walmart hasn’t been a slouch in the price appreciation category (the company’s stock price has more than doubled over the past five years), there’s reason to believe that continued outperformance could propel Costco to be worth more than Walmart over the course of the next three years.

Let’s dive into the factors that might lead to such a scenario playing out.

The Costco Bull Case

One of the most impressive performers in 2024 in the retail landscape, Costco saw its share price surge by more than 40% as investors looked for ways to play a continuation of the strength in consumer spending that had been seen up to that point. With a new Trump administration set to take office, investors appeared ready to pile into companies that could benefit from a surge in disposable income, with Costco clearly benefiting from the strength the company saw (particularly from higher-income consumers) last fiscal year.

The retail giant brought in revenues of more than $250 billion in 2024, supporting its rise to a market capitalization well north of $400 billion. On a price-sales basis (and considering Costco’s growth rate at this size), this valuation certainly makes sense.

The question of course is whether consumer spending may slow at some point, which would undoubtedly hit Costco, Walmart, and much smaller retailers to various degrees.

The thing is, I’m banking on Costco’s premium quality tier of consumer as the key differentiating factor that could drive outperformance in 2025 and beyond. Unlike Walmart, which is tethered much more to the lower and middle-income consumers, Costco’s appeal remains focused toward families looking to buy in bulk and those on the higher end of the income spectrum. Factoring in Costco’s e-commerce segment which grew at a 13.2% growth rate, there’s a lot to like about how the company is positioned right now. Indeed, Costco does appear to be in the right place at the right time currently.

Walmart

Walmart will undoubtedly remain a cornerstone U.S. retailer for decades to come. The low-cost retailer, noted for its “every day low prices” model, has seen robust financial performance in recent quarters. Much of this performance has been driven by the company’s focus on providing the most extensive retail footprint in the U.S., as well as the company’s ability to remain resilient and adaptable in an increasingly-competitive retail landscape.

Walmart’s strong results in 2024 led the company to share price gains of approximately 75% – that’s an incredible return, and one which led to further multiple expansion for what I’d argue is already a relatively expensive retailer compared to its growth rate.

Now trading at roughly 40-times earnings, Walmart is still cheaper than Costco (which trades around 57-times earnings). That said, the company’s revenue growth rate of 5.5% comes in well behind Costco, and one could make the argument that these sort of growth dynamics are likely to continue.

Now, Walmart’s e-commerce segment also outperformed, driving a considerable amount of the company’s overall growth. With online sales surging 27% year-over-year, there’s a lot for investors to like on the technology front. But one could also argue that without continued investments on this business line, Walmart’s growth numbers would likely be much lighter than where they are right now.

Walmart is still a cash producing machine, with $6.2 billion in cash flow last year supporting the company’s $10 billion cash position on its balance sheet. So, there’s a balance sheet stability argument to be made here. But I do think longer-term investors thinking about which is the better retailer to own for the long-haul, future growth prospects matter.

So, Which Is the Winner?

In my view, Costco is the preferable choice for long-term investors looking to add some exposure to the U.S. retail space.

Many investors may argue that now isn’t the time to invest in this space, given the potential impact of tariffs and how much uncertainty there is out there. However, I’d argue that these two companies have been long-term winners as ways to play U.S. exceptionalism in the retail space.

I’m of the view that over the long-term, American consumers will continue to spend, and do so at places they can find the best value. In that regard, both Costco and Walmart should be long-term winners worth considering.

That said, I do think Costco’s ability to out-grow Walmart in the years to come could position the stock to overtake Walmart in the market capitalization leaderboards, perhaps sooner than many think. We’ll have to see how things play out, but if investors continue to flock toward companies that are focused more toward higher-income consumers, Costco is likely to outperform most of its retail counterparts in the years to come.

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