On back of a key $13.7 billion acquisition of Whole Foods, Amazon.com, Inc. (NASDAQ:AMZN) is finally diving head first into the $700 billion US groceries market, after years of experimenting with food shopping services like Amazon Go and Amazon Fresh. Making waves in its first day as owner of Whole Foods, the e-commerce giant excited investors by cutting organic food prices by 43%, resulting in an 8% bump in shares yesterday, with the stock continuing to rise in pre-market trading by nearly 3%.
In light of the magnitude of the transaction, top analyst Youssef Squali of SunTrust is lowering EPS estimates in 2017 from $3.80 to $3.54 and 2018 EPS from $8.33 to $7.28 “to reflect the accretion to top line and dilution to GAAP EPS.” However, the analyst is raising revenue projections in 2017 from $169 billion to $173 billion and the 2018 revenue forecast from $207 billion to $225 billion.
As such, the analyst is maintaining a Buy rating on AMZN, while adjusting his price target from $1,220 to $1,190 representing a 24% rise over current trading levels.
Viewing the acquisition as a total victory for AMZN, the analyst underlines that “the company is acquiring one of the leading US grocers, guaranteeing itself instant brand recognition, geo coverage and scale.” Moreover, Squali says, “Amazon brings several unfair competitive advantages, that should drive market share gains and better profitability.” In slashing prices on organic food, AMZN is making a strategic decision “to sacrifice profit margins for an extended period, to gain market share and customer loyalty (op. margins at WF in ’16 were 5.5%). A pick-up in sales should drive higher profit dollars over time,” opines Squali.
Lastly, the analyst highlights the potential growth that integrating Prime into WF rewards could reap, noting it “is likely to fuel membership growth, drive repeat purchases and bring a treasure trove of offline purchase data, in our opinion. This move would not only drive further penetration for Prime (currently at 70M+HHs, by our estimate), it is also a critical piece of Amazon’s strategy of more effective merchandising by delivering personalized offers.”
Youssef Squali has a solid TipRanks score with a 71% success rate and a high ranking of #40 out of 4,621 analysts. Squali yields 18.6% in his annual returns. When recommending AMZN, Squali garners 40.2% in average profits on the stock.
TipRanks analytics exhibit AMZN as a Strong Buy. Out of 33 analysts polled by TipRanks in the last 3 months, 31 bullish, while 2 are sidelined on Amazon stock at this time. With a return potential of 23%, the stock’s consensus target price stands at $1,173.96.