A customer shops inside a Costco Wholesale Corp. store in Miami, Florida.

Scott McIntyre | Bloomberg | Getty Images

A customer shops inside a Costco Wholesale Corp. store in Miami, Florida.

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.