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Amazon will disrupt grocery stores next and that justifies its surging price, analyst says

  • "In our view, Amazon is likely to grow sales marginally faster than Walmart ... and substantially faster than Costco," Instinet writes in a note to clients.
  • The firm says the grocery industry remains one of the "largest and most under-penetrated markets" for Amazon today.
  • Amazon's initiatives include AmazonFresh, a grocery delivery service available exclusively for Prime members.

Amazon's accelerating expansion into the food business justifies its rallying stock and means the shares should go even higher, an analyst said Thursday.

Tapping into the grocery industry remains one of the "largest and most under-penetrated markets" for the e-commerce giant, Nomura Instinet analyst Anthony DiClemente wrote to clients in a note.

DiClemente has upped his target on Amazon's stock to $1,100 from $975 a share, representing a nearly 13 percent upside from Wednesday's closing price of around $976 per share. Amazon was lower in the premarket, part of a bigger down-move for online stocks lately.

When analyzing Amazon's North America business today, DiClemente said he compares the company closely to other big-box retailers Wal-Mart and Costco because they incorporate similar membership offerings and low prices into their businesses.

"In our view, Amazon is likely to grow sales marginally faster than Walmart ... and substantially faster than Costco," he wrote.

Wal-Mart and Costco are two major players seen as making moves of late to steal a larger share of the grocery market, as more competitors, like Germany-based grocer Lidl, open up shop in the U.S.

Meanwhile, Amazon is working on its own initiatives.

AmazonFresh, a grocery delivery service available exclusively for Prime members, is being tested and rolled out across more states, and Amazon Go, which boasts providing shoppers a checkout-free experience, is in the early stages of beta testing, according to the company.

On Thursday, grocery stocks were getting hammered, with Kroger's stock sinking more than 17 percent on the company's weak profit outlook. Shares of Whole Foods, Sprouts and Supervalu were also trading in red territory.

When it comes to grocery, convenience is key for customers today, commercial real estate firm Jones Lang LaSalle wrote in a recent report on the sector.

"Last year, JLL reported that it was crucial for grocers to prevail in three arenas: convenience, price, and experience," the firm wrote. "This year, JLL focused on convenience trends that are changing the way people shop for food. Grocers are trying to keep up with shifting demand."

Traditional grocers are no longer the only ones capable of capitalizing on "heightening convenience trends," James Cook, director of JLL's retail research, added. This is where a company like Amazon can come into play.

In addition to grocery, Amazon's Alexa platform offers a large advertising opportunity, as CEO Jeff Bezos and his team continue to "flex [their] muscles" in Amazon's core e-commerce businesses, DiClemente added.

Looking at these aspects of Amazon's business, this is where comparisons to technology companies Facebook and Alphabet make more sense, he said.

As of Wednesday's close, shares of Amazon have climbed more than 35 percent over the past 12 months, and the stock is up about 30 percent for the year-to-date period.

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