AI Boosts US Stocks, but Grocery Delivery is Amazon's Growth Bet

TradingKey - This year, AI has been a key driver of growth in the US stock market, but it hasn't significantly boosted Amazon's stock price. According to analysis by Morningstar, Amazon's primary growth engine stems from its grocery delivery business.

HSBC analyst Paul Rossington states that grocery delivery is a major catalyst for Amazon's growth, with the company's e-commerce segment poised to benefit, particularly through same-day delivery services. Amazon plans to extend same-day grocery delivery to over 4,000 small towns in the US by the end of the year, up from 1,000 towns in July.

Rossington notes that this expansion could considerably increase Amazon's e-commerce market share and boost sales per Prime member. He raised Amazon's price target from $256 to $260, reaffirming a "buy" rating.

According to Emarketer, the online grocery market is projected to reach $220 billion by the end of 2025, with an annual growth rate of 7.5% through 2028. Currently, Walmart leads with a 32% market share, while Amazon holds 23%, ranking second. However, Rossington believes Amazon still has the potential to take the top spot.

Rossington points out that Walmart's same-day delivery membership is in the tens of millions, whereas Prime membership is estimated to exceed 130 million. By leveraging the scale of Prime and same-day grocery delivery, Amazon can pose a significant challenge to Walmart's grocery business.

He also highlights another advantage for Amazon: the ability to support the low-margin grocery delivery business with its more profitable general merchandise lines, giving the company a structural cost advantage over other specialized online grocery platforms.

Notably, Amazon's same-day grocery delivery service relies on the company's investments in delivery and fulfillment logistics. By utilizing automation and robotics technology, Amazon has enhanced warehousing flow and inventory efficiency, making strategic changes like storing inventory closer to consumers and automating package sorting. Rossington says this has increased same-day delivery speeds by 30% while reducing costs.

Amazon is set to report its Q3 earnings at the end of October, and Rossington remains optimistic due to Amazon's repeated performance excellence and strong sales during July's Prime Day.