Amazon.com Inc (AMZN) has gained from its recent acquisition. Amazon stock could go higher.
Just over three months ago, eCommerce giant Amazon.com Inc (NASDAQ:AMZN) had announced its intention of acquiring retail grocery chain Whole Foods Market (NASDAQ:WFM) for a whopping $13.7 billion, 27% premium to WFM's then market cap. As expected, there was a bloodbath in the shares of grocery chains as many anticipated a price war which could damage the balance sheet of the incumbent chains. Well, they were not disappointed. Just after formally taking over Whole Foods, Amazon had announced sweeping price cuts up to 49% which led to another correction in retail stocks. However, there were also several investors and analysts who were skeptical of Amazon's acquisition of Whole Food's and questioned whether both the companies have any synergies, generally the purported reason for any acquisition.
If the initial reports are anything to go by, the Whole Foods acquisition could turn out to be a masterstroke for Amazon. According to Foursquare Labs Inc, the footfalls in Whole Food outlets jumped by over 25% in the days after the price cuts. The increase in traffic was more dramatic in some areas with stores in Chicago reporting as much as 45% jump in traffic. While a part of the rise in traffic could be attributed to the curiosity of consumers, some of them could become frequent customers. A lot will depend on whether the price is low enough to induce customers to change their shopping habits.
It is not only the traffic at Whole Food's which has increased, sales of WFM products on Amazon.com has also jumped up. Immediately after the acquisition, Amazon had put 2000 popular products from Whole Foods 365 Everyday Value brand on site for sale. Most of the products got sold out according to data collected by One Click Retail. Web sales of Whole Foods branded products totaled about $500,000 in the first week, according to One Click Retail’s estimate. Previously, Amazon had struggled with online grocery as many shoppers are still not comfortable buying their grocery's online. There is a lack of trust. People tend to be more careful about the stuff which is served on their dining tables. By selling Whole Food products, Amazon is reassuring its customers about the quality of the product they are buying. Amazon is leading on the quality assurance of the WFM brand and it is paying off.
According to TABS Analytics, a consumer products research firm, online grocery purchases increased from 4.5% in 2016 to 13% this year and Amazon has seen 10 percent to 15 percent gain in online grocery sales. The hope is that it could grow its online grocery sales relying on the Whole Foods brand. A large portion of grocery purchase is still done offline and WFM stores provide Amazon with a presence in the offline market.
Amazon.com Inc could add millions of Prime subscribers.
Whole Foods fits into Amazon's omnichannel strategy and gives it a foothold in the multi-billion dollar grocery market. Whole Foods acquisition is also expected to spur Prime subscription growth. According to Morgan Stanley analyst Brian Nowak, 38% of Whole Foods customers or about 5 million households, are not Amazon Prime subscribers. He expects Amazon to convert half of those customers to Prime membership. We have discussed several times how prime subscription drives Amazon's revenue growth.
Amazon.com is looking for a spot in your home.
Amazon is also concentrating on hardware segment which includes the Echo line of devices. At its Seattle headquarters yesterday, Amazon launched around half a dozen new devices including a $130 Echo Spot, a spherical alarm clock that displays information and streams video. You will no longer need to frantically search for your alarm clock in your sleep, you can just ask it to "shut up". Then there’s the $35 Echo Connect, which turns an existing phone line into a much smarter speakerphone. The company also revealed a new version of Amazon Fire TV streaming box packs with 4K and HDR enhancements with a remote for $70.
Amazon stock gets a bullish price target.
Given the growth prospects, Amazon stock has rallied over 25% this year, however, the stock has struggled since its recent earnings. After falling 10% from its pre-earnings peak, Amazon stock had rallied towards the end of the last month to hit the $1000 mark once again. But AMZN stock has once again retreated due to valuation and profitability concerns. However, if you go by Wells Fargo Securities recommendation, this may be a good time to buy Amazon stock. AMZN stock yesterday received its highest ever price target of $1400 from Wells Fargo indicating over 47% upside for Amazon.com.
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