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These trillion-dollar categories are driving Amazon's growth

When you think about Amazon (AMZN), clothing and groceries may not be the first things that jump to mind.

However, if a new Morgan Stanley research report led by Brian Nowak is right, these are likely to be the defining drivers for Amazon’s future growth. “We are often asked by investors which categories matter most to Amazon’s forward growth,” the report stated. “Our answer is Grocery and Clothing.”

This is because these are the two of the biggest categories in the US retail market, with a combined value of over one trillion dollars.

Clothing in general has one of the highest online penetration rates in the US; 52% of US consumers surveyed in the first quarter of 2016 bought clothing online in the prior 12 months. This beats out several other categories — including books, which were among the first items to be sold online.

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Amazon already has a very strong presence of its own in the online apparel category, and both its market share in that category and the category itself are growing rapidly. The report found that 45% of US consumers surveyed in Q1 2016 bought clothing on Amazon during the 12 months — up from 39% in the year before, and the biggest increase of any of the retailers tracked by Nowak.

Morgan Stanley’s research also shows that 29% of people who buy clothing online expect to increase the amount they spend over the next year. Combining this with Amazon’s growing market share leads the analysts to believe that Amazon is likely to grow from 5% of the US apparel market to 10% of the US apparel market by 2018.

Groceries are a bit different. They have a fairly small online market share right now, with 12% of US consumers saying they bought fresh groceries in the past year. Packaged groceries are a bit better off, with 18% of US consumers buying some of their groceries online in the year before they were surveyed in Q1 2016. The market for online groceries is growing rapidly, though — with only 8% of consumers having bought fresh groceries online and 16% of consumers having bought packaged groceries online in the previous 12 months before Q4 2015 ended.

Amazon also has fierce competition in the online grocery market with Walmart (WMT). Forty percent of consumers who have bought groceries online went to Walmart, while 38% went on Amazon.

Despite this competition from Walmart, Nowak is still bullish on Amazon’s potential in the e-grocery market. After all, Amazon is a very close second, and the market is very young. Amazon’s 38% market share translates into a mere 1% of the overall groceries market. Morgan Stanley expects Amazon’s share to double to 2% of the groceries market by 2018.

All of the trends are going the right way for Amazon in these two important categories, which is why it’s unsurprising that Morgan Stanley is bullish on the stock overall — rating it as “Overweight,” essentially the same as a buy recommendation.

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