Costco Downgraded After Amazon-Whole Foods Deal

On Friday afternoon, Goldman Sachs Analyst Matthew Fassler downgraded Costco Wholesale Corp. COST from "buy" to "neutral." Fassler also reduced the price target from $197 to $176 as Costco fell 7.2% at Friday's trading close.

This downgrade comes as a direct result from the announcement this morning that Amazon.com AMZN will buy Whole Foods Market WFM for $13.7 billion. Fassler states that Amazon's purchase makes Whole Foods a tougher competitor for Costco. As a result, the company has been removed from Goldman Sachs' conviction buy list.

"We see potential cap on valuation associated with Amazon's ongoing expression of interest in consumables, combined with fading fundamental catalysts," Fassler said.

Amazon's buyout of Whole Foods will force Costco to invest in ecommerce in order to stay competitive.

"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," Fassler wrote in a research report. Now that Amazon owns Whole Foods, "AMZN is likely capable of offering superior pricing and delivery competency vs. incumbents."

COST remains a Zacks Rank #3 (Hold). While the company may need to rethink what services it offers to keep up with Amazon, our current year consensus estimate shows positive year-over-year earnings growth for the company.

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