Fresh off its $13.7 billion blockbuster bid for Whole Foods Market, Inc. (NASDAQ:WFM), e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN) continues to push the envelope on what is possible at the intersection of retail and tech. And AMZN stock, meanwhile, continues to mock those who continue to bet against the billionaire founder and CEO Jeff Bezos.
Bezos has focused on building the company’s ecosystem while providing msustainable and predictable revenue growth; the company’s entry into the cloud with Amazon Web Services (AWS) is a strong example. Plus, when factoring in things like drones, long-haul freight deliveries, the company’s fleet of airplanes, and a host of other endeavors, Bezos has not only found ways to keep Amazon relevant, he’s disrupting industries that have been entrenched in antiquated ways to doing business, leaving traditional retailers, like Macy’s Inc (NYSE:M), Sears Holdings Corp (NASDAQ:SHLD) and J C Penney Company Inc (NYSE:JCP) to pay the price.
And with Whole Foods likely to soon be in his pantry, Bezos will have an asset to help the online juggernaut take on the $800 billion grocery business in the United States, which should scare the likes of Kroger Co (NYSE:KR) and Target Corporation (NYSE:TGT), especially given Amazon’s existing grocery delivery program, AmazonFresh. In the meantime, as the the deal for Whole Foods proceeds closer towards completion, AMZN stock — currently at around $955 — could bust through $1,150 to reach $1,200 and a 25% upside.
Reasons to Like AMZN Stock
The way I see it, the deal for the upscale grocer is a game changer. But it won’t stop there. Wanting to be a part of all facets of people’s lives, Amazon — which has ambitions to enter all facets of retail — is not done dealing. With the merger deal between Walgreens Boots Alliance Inc (NASDAQ:WBA) and Rite Aid Corporation (NYSE:RAD) is now officially off the table, and being modified to partial store acquisitions (2,186 total Rite Aid stores), analysts now believe Bezos’ next target could be the remaining Rite Aid locations that Walgreens won’t buy.
CNBC reported in May that Amazon had hired a business lead to help the company enter the lucrative pharmacy market. Americans spent some $300 billion on prescription drugs in 2015, with an estimated 4 billion prescriptions are filled. Analyst David Larsen of Leerink Partners believes the pharmacy market is primed for Amazon to want to disrupt.
“Following the [Whole Foods] acquisition, we estimate [Amazon] will still have a net cash balance of [about $100 million to $200 million] and a negative leverage ratio,” Larsen noted on June 27. “This leaves room for an additional debt-funded deal which could be either a pharmacy chain such as [Rite Aid] or a pharmacy benefit manager (PBM) if the company chose not to expand its internal offering.”
One PBM Larsen sees as a potential target for Amazon is Express Scripts Holding Company (NASDAQ:ESRX), which not only offers clinical solutions and specializes in pharmacy care, it also does home delivery and specialty pharmacy. Given how Amazon values data on its customers, Express Scripts’ specialization in consumer health and drug information services would give Amazon an entire medical clipboard on the health of its customers to go with the data it already has on consumer shopping habits.
Can Amazon afford Express Scripts? With a market cap of $38 billion and a net debt position of $12 billion, Express Scripts’ enterprise value comes to about $50 billion. And that’s without any premium. “Assuming a 30% premium, we estimate that such a NewCo of [Amazon, Whole Foods and Express Scripts] would have a leverage ratio of [about 1.8 times] which is reasonable,” Larsen wrote. “We note that [Amazon] alone generates enough [free cash flow] to handle an additional $1.5 billion of interest expense assuming 3% debt.”
Bottom Line for AMZN Stock
Bezos has built Amazon and grown his wealth by embracing risk. While Express Scripts — as with Whole Foods — would be a risk, it is one worth taking, given the $300 billion-plus prescription drugs market. Like Apple Inc. (NASDAQ:AAPL) founder Steve Jobs, Bezos has a knack for ignoring what Wall Street prioritizes (such as profits) to focus more on what customers want next — before they even realize that they want it. As such, AMZN stock price has tons of tailwind to continue its march higher, reaching $1,200 in the next 12 to 18 months.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
