Ever since Amazon.com, Inc. (NASDAQ:AMZN) bought Whole Foods Market, every analyst and investor has been running through the streets, trying to convince everyone that they absolutely know what company Amazon will buy next and what it will mean for AMZN stock.
It will eventually buy something, but it will not be this week’s candidate: Target Corporation (NYSE:TGT). This ludicrous assertion was made by Loup Ventues’ Managing Partner, Gene Munster. This is the same guy who thinks Telsa Inc. (NASDAQ:TSLA) is going to ramp Model 3 production to 150,000 this year.
What is Munster smoking?
Amazon Doesn’t Have Money to Throw Around
Look, Amazon is not Apple Inc. (NASDAQ:AAPL). It doesn’t have $200 billion to throw around. In fact, it has almost no cash on hand. That means any acquisition has to be funded with AMZN stock, which would dilute shareholders, or debt.
Amazon has other problems too. The stock market is 30% overvalued. Target shareholders would be taking Amazon stock that trades at a $570 billion valuation. That’s insanely expensive. Not only that, Amazon trades at 3.0 times revenues while Target trades at only 0.5x revenues. So, AMZN stock is incredibly overvalued.
Debt isn’t an option, because Target’s valuation is presently $36 billion. I know Amazon loves spending money and growing revenue, without caring much about profits. But why in the name of Warren Buffett would Amazon draw down $45 billion (since TGT shareholders would demand a premium), costing it at least two to three billion dollars annually in interest, to buy a business that only generates $2.7 billion per year in profit.
Amazon: If It Isn’t Broke, Why Fix It?
The whole reason Amazon has conquered retail is because it is NOT a brick-and-mortar operation! Why would it buy a brick-and-mortar operation with only 60% of its revenues? This is just crazy talk.
Meanwhile, Amazon is tearing up the retail world and Target — like almost every retailer — is trudging along with flat-to-down revenues and weak comps. Why would Amazon buy what amounts to the ugly stepchild?
Everyone says that buying a retailer like Target would mean synergies in terms of being able to sell retail at lower prices. But Amazon already does that — with the benefit of the consumer never having to leave home.
The other supposed plus of buying Target is that it would given Amazon more locations to distribute from and take returns from consumers. Well, it’s a lot easier to just buy up warehouses than buy a $45 billion company.
Not only that, investors will look at Amazon like Jeff Bezos is crazy: “Jeff, why are you getting into brick-and-mortar when your whole plan has been to destroy it?”
Bottom Line on AMZN Stock
Amazon will make other purchases, but they are likely to be along the lines of what John Malone does. He buys assets that are cash flowing that have limited overhead, or are cash flowing with a lot of overhead, but from which he can draw down huge amounts of debt against. Then, he uses that debt to repurchase tons of stock. Because the cash flow is high, the interest rates are low.
There is no way Amazon will buy Target. Investors in Amazon should buy the stock if they believe in the company long term. The same goes for Target, which is facing a much harder battle.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.