Amazon.com, Inc. (NASDAQ:AMZN) shares are up 3% in Friday’s trading session, following the news that the e-commerce giant has reached a definitive agreement to acquire Whole Foods Market (NASDAQ:WFM) for $13.7 billion ($42/share; 27% premium to WFM closing price) in cash. This marks the largest M&A transaction in Amazon history.
How significant can this be for Amazon? Piper Jaffray’s top analyst Michael Olson answers: “Whole Foods will add ~$16B of new revenue to Amazon’s model at a higher operating and EBITDA margin than Amazon’s current North America retail division. Obviously, the large opportunity here is the disruption of grocery – while under the Amazon Fresh model (which required dedicated grocery fulfillment build-outs) we haircutted the US’s $600B grocery market to $200-$300B due to logistical and affordability constraints. Given Amazon’s clear opportunity to make delivery universally available and the potential to use private label to decrease the cost of groceries/consumables, we now see the full grocery TAM as Amazon’s opportunity.”
The acquisition also caught a few analysts by surprise. RBC’s Mark Mahaney explains: “We view this as a somewhat surprising step by AMZN – This would be the largest acquisition Amazon has done to date, by a factor of 10x+. That’s the first surprise. The second is that while the company has been establishing a tentative physical footprint with a small number of Amazon Book Stores, the company has always veered away from physical retail presences. The investment thesis on AMZN has ALWAYS been that the company has traded off rising retail costs for declining technology costs. That said, the company has clearly signaled its intent to more aggressively invest in new growth options (look at Bezos’ last two Annual Shareholder Letters and our Fourth Pillar report – June 2016), and we have for some time identified Groceries as one of the most logical places for Amazon to expand into. So with that as backdrop, we view this development as somewhat rather than totally surprising.”
Olson and Mahaney reiterate an Overweight and Outperform ratings on Amazon shares, respectively, with Olson sees Amazon reaching $1,200 in the next 12 months, while Mahaney is a little bit behind with $1,100.
According to TipRanks.com, which ranks over 4,500 financial analysts to gauge the performance of their past recommendations, Michael Olson and Mark Mahaney have a yearly average return of 16.2% and 21.7%, respectively. Olson has a success rate of 65% and is ranked #91 out of 4569 analysts, while Mahaney has a 73% success rate and is ranked #14.
Out of the 41 analysts polled by TipRanks (in the past 12 months), 38 rate Amazon stock a Buy, while 3 rate the stock a Hold. With a return potential of 9%, the stock’s consensus target price stands at $1084.14.