That was fast. In mid-June, Amazon.com, Inc. (NASDAQ:AMZN) announced it would pay $13.7 billion to buy Whole Foods Market, Inc. (NASDAQ:WFM). Today, Amazon celebrated its first official day in charge of WFM by slashing prices by as much as 43%. Despite this, AMZN stock is barely hiccuping a gain.
For Amazon’s part, the company isn’t wasting any time getting started. Whole Foods customers have seen lower prices on popular foods like avocados immediately.
The repercussions didn’t go unnoticed, as shares of Kroger Co (NYSE:KR) fell 8% on Thursday, Sprouts Farmers Market Inc (NASDAQ:SFM) gave back 7% and another 9.7% Monday, and Target Corporation (NYSE:TGT) shaved 4% Thursday. Even Wal-Mart Stores Inc (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST) fell 2% and 5% on the day, respectively.
It won’t be long before Amazon meshes its Prime membership with Whole Foods offerings. The company said it will integrate Prime into WFM’s point-of-sale system, allowing it eventually act as the customer rewards program.
The potential with AMZN-WFM is obvious. The questions are, what does this mean for its competitors and what does it mean for investors?
Whole Food’s Competition
Adding Whole Foods’ private-label products to Amazon and its various platforms (Fresh, Pantry, etc.) puts even more pressure on traditional grocers. Then there’s the meal-kit delivery, which Blue Apron Holdings Inc (NYSE:APRN) seemingly doesn’t stand a chance in now with Amazon in the way.
Competing against AMZN must feel unfair because its investors do not concern themselves with the valuation. They buy Amazon — with its $455 billion market cap and price-earnings ratio of 240 — on the expectation that AMZN stock will be even more massive years or decades into the future. Because of that investment thesis, they are willing to overlook the valuation argument. In a somewhat ironic twist, investors also don’t seem to care about the valuation of traditional grocers either. Only instead of paying an endlessly higher valuation, they don’t want to pay a premium of any type.
Because of that investment thesis, they are willing to overlook the valuation argument. In a somewhat ironic twist, investors also don’t seem to care about the valuation of traditional grocers either. Only, instead of paying an endlessly higher valuation, they don’t want to pay a premium of any type.
The main issue for traditional grocers has been dwindling margins. With Amazon cutting prices at Whole Foods though, this could put even more pressure on margins. If it were Target or even Walmart doing this, it might not matter. In fact, their own stock would likely suffer as a result. But it’s different because it’s Amazon, and the market knows AMZN stock investors will sacrifice margins in lieu of market share. That makes it very difficult for a company like Kroger to compete, because its investors don’t have the same mindset.
The names above — TGT, SFM, KR and COST — are all sporting their lowest P/E and price-sales ratios in several years. The lone exception here is Walmart. While WMT stock sold off Thursday, investors know the country’s largest retailer is bulking up for the retail fight of the century. WMT’s acquisition of Jet.com for $3.3 billion shows its willingness to tangle in the e-commerce space. While Jet.com will likely never be what Amazon has grown into, it gives Walmart a platform to keep Amazon from controlling the entire market.
Another factor in the Amazon versus Walmart debate? Demographics. Walmart is known for low prices, and plenty of its $485 billion in annual sales is driven by an American consumer doing their weekly grocery shopping or bargain hunting. In fact, the “average” Walmart shopper has a household income of just $53,000, according to one study.
Then there’s this, from a recent Money Magazine except:
“Demographics help explain why [Costco] has taken a hit. Unlike Walmart, Costco customers mirror Amazon’s Prime’s — large households with higher-than-average incomes. A survey by the brokerage [firm] Stifel found that about a quarter of Costco and Amazon Prime shoppers earn more than $100,000 a year.”
In the same article, a Deutsche Bank analyst questioned whether Costco would suffer from membership renewal declines in the future, thanks to its similar customer base with Amazon Prime. In other words, Walmart’s unique demographic may protect its business while it ratchets up for a larger fight. Costco, though, shares the same demographic as Amazon, and COST stock could be in trouble as a result. Others, like Target, likely fall into the same boat.
Others, like Target, likely fall into the same boat.
Investing in AMZN Stock Click to Enlarge Source: OptionsAnalytix
All of this circles back to the question of, “should I buy AMZN stock?” Depending on the investor, I think the answer is “yes” — but it depends on the price. I would not be a buyer of AMZN stock above $1,000. Even near its current $950 a share, I am hesitant.
The best strategy with Amazon? Patience, both when looking to buy and when owning the stock. In February 2016, a market scare sent AMZN stock from $700 to $475, a 32% drop in about a month. What if we get a market-wide panic driven by geopolitical issues, a government shutdown or worries over the Federal Reserve?
We don’t need the S&P 500 Index to falter double-digits, nor for Amazon to fall 32% again. A fall into the $700s or $800s would make AMZN stock more attractive for long-term investors to start a new position.
AMZN stock has been acting sick lately, but continues to find support near current levels. That will entice some investors to buy it now, and perhaps they’ll be rewarded. For me personally, I would rather wait for a larger pullback. It will eventually materialize, whether it’s Amazon-specific or a result of a broader market decline. Perhaps it’s closer than we realize, given the markets are entering the most volatile time of the year. That’s when investors need to pounce.
Amazon is gunning for world domination. It’s in the cloud, e-commerce and now grocery. Its success won’t be instantaneous, nor will the demise of traditional grocers. There are reasons to be long AMZN stock, but long at a reasonable price.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.