GUSH

Veteran investors probably remember when shares of then-young e-commerce giant Amazon (AMZN +6.12%) were uncomfortably expensive. People paid this premium anyway, recognizing the company's eventual potential. Even older investors might recall a time when club retailer Costco Wholesale's (COST +2.67%) stock was unusually cheap, in line with other stocks in the slow-growth retail industry.

My, how times have changed. The growth stock that's historically been priced like one is now trading a trailing price/earnings ratio of only 20, roughly in line with the average value stock. Conversely, priced at 50 times its trailing earnings, Costco shares are priced more richly than most established growth stocks. What gives?

The role reversal makes some sense, given the backdrop. Both camps, however, have arguably overshot their target.

Comparing and contrasting

If you know much about the company, then you know online retail and consumer-facing services make up three-fourths of Amazon's revenue, while cloud computing (Amazon Web Services) accounts for more than 60% of its operating income. And for as long as Amazon was the biggest name in the fast-growing space, investors were comfortable paying a steep price for a stake in the company. And they did, all the way through 2024.

Nothing draws out competition like proven opportunity, though. Inspired by the then-rapid proliferation of artificial intelligence, Alphabet and Microsoft really turned up the heat on their cloud computing businesses, slowing Amazon's growth and undermining its pricing power. Unsure of when this competitive headwind will end -- or now, fearing the company has overcommitted to AI -- the market is cautiously pricing in the potential end of Amazon Web Services' strong growth.

AMZN PE Ratio data by YCharts

The same basic concern is also what's pumping up Costco's stock valuation. That is, fearing a collapse of the artificial intelligence industry's growth could impact other segments of the economy as well, investors are seeking out protection with positions that should hold their value when little else does. A seller of low-cost consumer goods is such a name.

Indeed, if you look closely at Costco stock's P/E history below, before it was able to renormalize in 2024, it began marching its way to a record high of more than 50. That's when technology stock valuations also began to reach uncomfortably high levels that some investors were quietly questioning.

COST PE Ratio data by YCharts

But is this valuation disparity deserved? Yes and no, but mostly no.

Right idea, but...

Don't misread the message. Costco offers above-average safety that's worth paying something of a premium for right now in this uncertain environment. At the same time, the artificial intelligence industry's red-hot growth, which drove Amazon Web Services' sales up 39% during the third quarter of this year, could still suddenly slow to a crawl.

Both stocks' current valuations, however, are pricing in more catastrophe than is realistically likely.

That's not the end of the world. It's generally better to be too cautious than not cautious enough. Once whatever the market is afraid of runs its course, however, investors are apt to realize COST is a bit too expensive here, while AMZN is too discounted. It happens. Just recognize this translates into a buying opportunity for anyone eyeing a stake in Amazon.