Why Amazon.com, Inc. (AMZN) Sees Groceries as Its Holy Grail

Most investors think Amazon.com, Inc. (NASDAQ:AMZN) can do no wrong. This is a stance you should be suspicious of, just as you’re suspicious when people say a company with a track record of profit can suddenly do nothing right. I suggested buying AMZN stock on its recent earnings miss and the story had barely been posted before Amazon stock recovered. That’s a sign of a hot stock.

Why Amazon.com, Inc. (AMZN) Sees Groceries as Its Holy Grail
Source: Amazon

At its current level of about $851 per share, you’re looking at a 13% gain year-to-date, a 46% gain for the full year. The shares I bought in 2014, when they were at an average of $330, look like a very sweet deal indeed.

The company’s market cap, $404 billion, is the fifth largest and its 12-month gain is the best among the biggest stocks.

Now AMZN is planning to open brick-and-mortar stores, and sell fresh food. Should investors be suspicious? If recent news of a potential delay in the launch of its Amazon Go grocery store is any indication, the company’s ambitions will be more difficult to turn into reality. Reports indicate that AMZN is struggling to keep track of its customers and items in its test stores.

However, technical issues aside, Tom Caporaso, CEO of Clarus Commerce, which offers online merchants subscription and loyalty programs, told me that investors shouldn’t be skeptical of its objective to enter the grocery space.

AMZN and Groceries: The Point Is Velocity

The point of getting into fresh food isn’t to gain sales and margin, he said, but velocity. “Amazon is a closed loop marketing engine,” in which the more often you buy from Amazon, the more things it can sell. If you’re buying apples and kale from AMZN, you’re buying from them several times a week, and that is the point of the exercise.

You shouldn’t expect hundreds of Amazon stores to open this year, Caporaso said, maybe no more than 20, and you shouldn’t expect Amazon to be selling bananas everywhere all at once. It’s the company’s ability to learn from mistakes that makes it powerful, and its willingness to try again with an improved offer that makes it such a fearsome competitor.

“They start small, learn and optimize, then roll out over time instead of getting in big,” he explained. “They are data driven, taking these ideas and continually moving forward based on data, rather than making big bets.”

Meals Are the Holy Grail for Amazon Stock

Where Amazon is heading, Caporaso said, is the dinner table, and this should make grocers like Kroger Co (NYSE:KR), Whole Foods Market, Inc. (NASDAQ:WFM) and Wal-Mart Stores Inc (NYSE:WMT) very nervous over the next two to five years.

The woman to watch is Martha Stewart, who is now selling her meal kits through AmazonFresh in four markets. There are now 150 players in this space, selling pre-packaged meal ingredients, with directions and looking to disrupt both grocers and restaurants.

The point of a meal kit is that you get everything you needed to cook a meal, which can both minimize food waste and teach basic cooking skills. The meal kit industry has already moved from basic meals to specialty meals, including athlete meals, baby meals and vegetarian meals.

Martha Stewart is Amazon’s stalking horse in the meal kit business.

There are many moving parts to this business — supply chains, recipe choices, daily packing, fresh shipping and marketing. Optimizing the moving parts so you don’t get stuck with the waste is the difference between profit and loss. No player has yet done that well enough to consider going public.

For now, Amazon is letting Martha worry about that. AMZN wants to see if its infrastructure can be the extra ingredient that makes the meal kit pay before it makes a major play. Once it does, Caporaso said, watch out.

Bottom Line on AMZN Stock

The main reason investors have gone from hating Amazon stock to loving it over the last three years is that the company may still make mistakes, but it is careful now to make small mistakes only. This is a lesson it learned, the hard way, with its Fire Phone. Sending a piece of hardware to do what an app could do, or a collection of apps in Amazon’s case, was its biggest mistake, which taught it its biggest lesson.

Groceries, especially fresh groceries, may not add much to the AMZN stock’s bottom line, but it does increase how many times people use the service, the utility they get from the service and, in the long run, furthers Amazon’s plans to dominate all retailing. It’s what you want to watch if you’re bullish on the company and looking to time a purchase.

Buy if Martha fails, buy more AMZN stock if she succeeds.

Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN and KR.

Article printed from InvestorPlace Media, https://investorplace.com/2017/03/amazon-com-inc-amzn-groceries-holy-grail/.

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