Amazon: The Stock Market's Boogie Monster
The New Boogie Monster
The new boogie monster is the second most used search engine online, has the second largest cloud platform, and is the number one retailer. Do you want electronics, toys, games, books, clothing, music, video, streaming? The new boogie monster has it. Under one name you can purchase almost anything you can think of. There is no longer a need to go to bestbuy.com, then toysrus.com, then gamestop.com, then macys.com, then barnesandnobles.com, and then who ever is still selling CDs online dot com. Everything you need is under one umbrella. Amazon has been able to conquer the one-stop-shopping idea better than any other retail entity has before it, making it a behemoth of a company.
Wall Street’s Love's this Boogie Monster.
There is a lot to love for Amazon, and although it’s not as profitable as I personally would like it to be, it’s easy to see why Wall Street loves the company and the stock. It’s a huge company but it moves like a young start up, Amazon’s ability to start selling a product or service as it feels like makes it a lovable company for Wall Street brokers and analyst. The company even turns failure into success. It failed with its Fire phone, but took the best part of the phone - the digital assistant Alexa - and moved it into a smart speaker. The Alexa smart speaker has become a top selling consumer electronic item, spurring Google and Apple to create their own to compete with Amazon's Alexa speaker.
The company has come a long way from selling cheap books online, and it appears it isn’t close to where it wants to be. Jeff Bezos and the Amazon team continue to add products and services under the already dominant retailers umbrella.
When the Boogie Man says Boo
Wall Street’s crush on Amazon can be a bit out of hand sometimes. For every new service Amazon adds under it’s umbrella, competing companies lose hundreds of millions of dollars in market capitalization. Wall Street has turned Amazon into the boogie man. The company hiding in the closet, waiting to enter an industry or sector and send the competition hiding under the covers.
Over the past few years, we’ve seen Amazon scare billions of dollars of market cap away from retailers, grocers, drug companies, pharmacies, and the shipping/delivery companies. Amazon entering (fill in blank) industry sends the stocks of the current players in that industry sliding and Amazon’s stock sky rocketing. However, this may not be a bad thing for investors who are looking for good companies at bargain prices.
The Great Amazon Misconception
The biggest misconception about Amazon is that it kills industry players or it killed retail. There is no idea further from reality than this. Amazon didn’t kill retail, retail failed to change and adapt to consumer shopping behavior. While Amazon was training consumers to purchase goods online what were the other retailers doing? The bad decisions of dozens of retailers have come back to hurt the good companies who have adapted and updated their business model around the changing consumer.
The Good Businesses
The good businesses have not been immune to Amazon's boogie monster ways. When Amazon peeks out of the closet into an industry, good companies loose millions of dollars in market cap as well as the bad companies operating in the industry.
According to this chart by CNBC of U.S. Grocer Market Share in 2016, Kroger was the number two grocery chain behind Walmart. The rumors of Amazon buying Whole Foods sent Kroger’s stock sliding, but why? Amazon was the 14th ranked grocer with 0.19% marketshare and Whole Foods came in at number 10 with 1.21% marketshare. When number 10 and 14 join forces, it usually doesn’t effect number 1 and 2 immediately as it did when Amazon announced its purchase of Whole Foods.
Now Kroger did have its issues prior to the Amazon/Whole Foods deal announcement, but to believe that Amazon and Whole Foods with market shares of 0.19% and 1.21% respectively were going to crush the grocer with the second highest marketshare was a major over reaction.
Two recent victims of Amazon eyeing an industry were Fedex and UPS, which lost billions of dollars of market value between them when Amazon announced they would look to enter the delivery and logistics business. UPS, which traded at over $130 per share at the beginning of the year fell to $103.81 and Fedex shares fell from $274 to $226 following Amazon’s announcement.
Overreaction by investors? Absolutely. When we compare Fedex, UPS, and Amazon, it's obvious that Amazon does not yet have the infrastructure in place to handle all of its own deliveries. According to Planespotters.net, Amazon Prime currently has an airplane fleet of 22 Aircrafts, Fedex operates the worlds largest cargo fleet with 650 aircraft, and UPS has a fleet of 242 planes. 22 planes versus 800 plus planes, only on Wall Street do people think 22 planes can compete with 800 planes plus
Investing after the Overreaction
In the cases of Kroger, UPS, and FedEx, Wall Street's overreaction allowed smart and patient investors to get bargain entries into good companies. After Amazon scared the weak and some strong hands away, Kroger traded down into the low $20 range in October 2017. Kroger's stock then made a come back making a run back to $30 per share. UPS, which fell to the low $100 area made a run recently trading above $114 per share on April 30, 2018. FedEx, which traded down to the $226 area after the Amazon announcement traded back over $250 per share in mid April 2018. Profits, profits, and more profits for the patient investor.
The Next Time Amazon Says Boo.
As stated earlier Amazon isn't finished invading industries and scaring away market value. The company seems to always be looking for the next market to enter. So the next time Amazon says boo and Wall Street overacts, here are some tips to take advantage of the markets overreaction.
1. Get out of the way of the selling.
When the announcement is made that Amazon is entering industry (fill in the blank) and companies X,Y, and Z fall drastically, don’t be in a rush to buy. An investor should let the news cycle surrounding the event die out before considering a buy.
2. Research the company whose stock price is falling and the industry it's in.
As we pointed out with Kroger, it was the number two grocer based on marketshare. With UPS and FedEx, Amazon's fleet wasn't large enough to handles all of the company's deliveries so they would still need to rely on UPS and FedEx for the foreseeable future, and a note in the UPS annual report stated,
“No single customer accounts for 10% or more of our consolidated revenue. We do not believe the loss of any single customer would materially impart our overall financial condition or results of operations...”
This made us even more confident in a potential UPS investment. Also in our research we noticed that Amazon has made the threat of doing it's own deliveries before, several years ago. We wondered if this was a tactic by Amazon to negotiate better rates with UPS and FedEx.
3. Determine if the company can withstand Amazon as a competitor. Then determine if the company's management is maneuvering the company in a way that will keep it competitive in the future against Amazon and others that may try to enter the industry.
In the case of UPS and FedEx, what both companies have that Amazon lacks is infrastructure. No company - not even Amazon - can put together an infrastructure like that of UPS and FedEx overnight. When reviewing Kroger, the company was moving into online ordering with a pickup option as well as looking to take advantage of the growing trend of Americans dining out. While the company was aware of the competition an Amazon and Whole Foods merger would present, Kroger was preparing and adjusting to how consumers shop for groceries. This was enough for us to believe that Kroger would be a good long term investment.
Recently there has been a lot of speculation that Amazon will enter the healthcare industry. If and when they make the announcement we are sure that good and bad companies in the healthcare field will see their share prices fall. So the next time Amazon says boo and scares a stock into tanking pay close attention, this may be an opportunity for quick investment profits.
Do you think you know what industry/sector Amazon will enter next? If so let us know below. Check out sevillereport.com for news, updates, and investment ideas.
May your next investment be your best investment.