Investing

Goldman downgrades Costco after Amazon's deal for Whole Foods

Key Points
  • Goldman Sachs says Costco will face increasing competition from Amazon after its deal to buy Whole Foods Market.
  • The firm downgrades its rating for Costco to neutral from buy.
  • Says key catalysts for the stock are in the past, including announcement of special dividend.
A customer shops inside a Costco Wholesale Corp. store in Miami, Florida.
Scott McIntyre | Bloomberg | Getty Images

Goldman Sachs says Costco will face increasing competition from Amazon after the e-commerce giant's $13.7 billion deal to buy Whole Foods Market.

The firm downgrades Costco's shares to neutral from buy and removes it from its conviction buy list.

"We see a potential cap on valuation associated with AMZN's ongoing expression of interest in consumables, combined with fading fundamental catalysts," analyst Matthew Fassler wrote in a note to clients Friday. "Also, increased expansion by AMZN and online investment by WMT create an imperative for COST to intensify its own investment in ecommerce."

The analyst reduced his price target for Costco to $176 from $197, representing 5 percent upside from the company's midday Friday $167.54 trading price.

Fassler also noted that many of the positive catalysts for Costco are now in the past, including the sales benefit from switching to Citibank's Visa credit card and the announcement of its special dividend.

"COST's competitive edges have related to natural and organic and its membership model, which despite significant overlap with AMZN Prime offered an option focused on consumables not easily available via AMZN," he wrote. With the Whole Foods acquisition "AMZN is likely capable of offering superior pricing and delivery competency vs. incumbents."

— CNBC's Evelyn Cheng contributed to this story.

Disclaimer

WATCH: An inside look at how Amazon Prime Now delivers food and household items in less than two hours

An inside look at how Amazon Prime Now delivers food and household items in less than two hours
VIDEO1:5701:57
Inside Amazon's Prime Now hub in Seattle
Berkshire Hathaway Live Event