Walmart (WMT) or Costco (COST): where does the cash go?

2026-10-07 · By Lubin Danilo, founder of Lubin Investment

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Costco is the better business of the two: its free cash flow grew 46% in four years, while Walmart's fell 42% in five, absorbed by investment spending up 2.6 times. But neither stock is at a price my model considers reasonable today.

Walmart and Costco look alike from a distance: big stores, low prices, full carts. Up close, they are two very different machines. I ran both through my grid, which judges a company on ten financial criteria, separately from its price. Costco scores 7 out of 10, Walmart 4 out of 10. The gap does not come from sales, it comes from what is left once the bills are paid.

A word on the figures: the two fiscal years do not end on the same dates (Walmart closes at the end of January, Costco at the end of August). So I compare each company with itself over the same span of its own accounts, not calendar year against calendar year.

Who actually keeps the cash?

Free cash flow is the money left in the till after paying salaries, taxes and the investment needed to keep running. On $100 of sales, Walmart keeps $1.80 and Costco $2.70. Both margins are thin, which is the nature of low-price retail. What matters is the slope.

At Walmart, revenue went from $559 billion to $713 billion between January 2021 and January 2026 (+27%), and net income from $13.7 billion to $22.3 billion (+62%). Yet free cash flow went from $25.8 billion to $14.9 billion (down 42%). The reason shows up in capital spending: from $10.3 billion to $26.6 billion a year. Walmart is building warehouses, delivery hubs and automation. I have no document that itemises this line, so that is my own reading (inferred), but the order of magnitude is there. One honest caveat: 2021 was a pandemic year with inflated cash. Since January 2022 ($11.1 billion), free cash flow has recovered 35%, which is real, but far from keeping pace with profit.

At Costco, revenue went from $196 billion to $275 billion between August 2021 and August 2025 (+40%), net income from $5.1 billion to $8.1 billion (+59%), and free cash flow from $5.4 billion to $7.8 billion (+46%). Costco also invests more ($3.6 billion to $5.5 billion a year), but its cash follows its profit instead of drifting away from it. The share count has barely moved (about 445 million), while Walmart bought back 6% of its shares in five years.

The business model explains why. Costco sells close to cost and earns most of its profit from membership. In its fourth quarter 2026 release, published on 24 September 2026, membership fees brought in $1.85 billion (+7.3%), with 150.4 million cardholders and an 89.8% worldwide renewal rate. A membership renewed almost 90% of the time is revenue with almost no acquisition cost. But management said this quarter is the last to benefit from the September 2024 fee increase: fee growth will now depend on new members, not on a price hike.

Walmart tells a different story. In its second quarter fiscal 2027 release, dated 20 August 2026, sales rose 5.9% to $187.9 billion, e-commerce 23%, advertising 38% and membership fees 17%. Operating income jumped 28.8%. Advertising and membership are high-margin businesses: a sign that the investment is starting to produce a different kind of profit. That is the strongest argument for Walmart, and it still has to show up in the cash.

And at today's price?

To judge the price, I look at the P/FCF: the share price divided by free cash flow per share, in other words the number of years of cash you pay for. Walmart is valued at about 63 times its free cash flow, higher than 92% of its own history. Costco is at about 53 times, higher than 74% of its history, and above 79% of the discount retailers in my database (sector median around 28 times). In both cases the market is paying for a story: advertising and e-commerce for Walmart, the regularity of a club with 90% renewal for Costco.

My reasonable buy price (the share price at which my model gives about 15% a year over five years, on prudent assumptions) is $13.87 for Walmart against a $107.20 share price, an 87% premium. For Costco it is $477.48 against $935.68, a 49% premium. Walmart therefore looks more excessive, but the gap is partly mechanical: my model extrapolates the recent drop in its cash, whereas advertising could reverse it. My verdict: Costco is the better business, but 53 times its cash leaves little room for error. Walmart is pricier for cash that is not following yet. Neither passes my price test today, and that is all the test says: not a forecast of a fall, a discipline rule.

Knowing whether a company is good and at what price to buy it, separately, in seconds: that is what I wanted to be able to do for any stock. You can find both full files on the Walmart page and the Costco page, and my methodology details each criterion.

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About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).