Better Growth Stock: Costco vs. Visa

Key Points

• Costco is an industry-leading retailer that continues to grow rapidly.

• Visa is an industry-leading payment processor with strong growth.

• If you care about valuation, one of these two stocks will be far more attractive.

• 10 stocks we like better than Costco Wholesale ›

Visa (NYSE: V) and Costco Wholesale (NASDAQ: COST) both are attractive and well-run businesses. A key highlight for each is growth. Before you go and buy either one, however, you need to consider the value of what you are buying. If you do that, you will likely want to keep one of these growth stocks on your wish list while you buy the other.

Growth is the name of the game

In the third quarter of fiscal 2025, ended June 30, Visa's revenue rose 14% with adjusted earnings up 23%. Those are impressive growth statistics. The big story here, however, isn't one quarter. Visa's payment processing services connect buyers and sellers, with the big trend being the ever-increasing use of digital and card payments over cash. That's not likely to end anytime soon, so the long string of strong financial results Visa has put up is likely to keep going.

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Costco's third-quarter fiscal 2025 financial results, for the period ended May 11, were strong, too. This club store retailer saw its top line expand by 8%, with same-store sales up a solid 5.7%. Earnings rose 13%. The retailer's club store model, which requires customers to pay a yearly membership fee, creates an annuity-like income stream and gives Costco the wherewithal to accept lower margins. It has been a winning model for decades and there's no reason to believe that's going to change.

Two good businesses, but one is a better value

Wall Street isn't oblivious to the growth stories here. So neither Costco nor Visa are cheap stocks, from a valuation perspective. Which is where Benjamin Graham, the man who helped to train Warren Buffett, comes into the story. To paraphrase Buffett's mentor, even a great company can be a bad investment if you pay too much for it.

Right now, investors are paying a rich premium for Costco's stock. The price-to-sales ratio is currently about 1.6 versus a five-year average of roughly 1.1. The price-to-earnings ratio is about 55 today, versus a long-term average of 43. And the retailer's price-to-book value ratio is about 16 compared to a five-year average that's just under 12. As if that weren't bad enough, the lofty P/E ratio is currently near the highest levels in the company's history. This is a very expensive stock.

In contrast, Visa's valuation looks much more reasonable. The financial giant's P/S ratio is 16.3 versus a five-year average of 17.7. Its P/E ratio is 32 versus a longer-term average of 34. But the P/B ratio is about 17 versus a five-year average of closer to 13. That said, the dividend yield, while only 0.7% or so, is actually toward the higher side for Visa, historically speaking. (By comparison, Costco's yield is about 0.6%, and it's near the lowest levels in the retailer's history.)

Although it wouldn't be fair to suggest that Visa is cheap today, it looks fairly priced -- and much less expensive than Costco. All in, if you are a growth investor, you will probably want to look at Visa as a potential buy. Costco should stay on the wish list.

There's nothing wrong with growth, but you still need to consider valuation

Just buying willy nilly into a growing business is a risky move. Sure, that growth could pan out and lead to material stock price gains. But Wall Street often prices lots of good news into the stocks of fast-growing companies, extrapolating growth trends far into the future. That's why most growth investors should really be growth at a reasonable price, or GARP, investors. And if you follow the GARP model, Visa is likely to win out over Costco today.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Visa. The Motley Fool has a disclosure policy.