It remains to be seen if the eye-opening prediction that Amazon.com, Inc. (NASDAQ:AMZN) will acquire Target Corporation (NYSE:TGT) this year was just a savvy publicity stunt, or an actual expectation. With TGT stock jumping nearly 2% on the mere mention of the idea though, the market may well be leaning towards the latter.
It was Loup Venture co-founder Gene Munster’s, by the way (yes, the same Munster that used to handicap stocks for Piper Jaffray), that made the call. He explained within a report dissecting a total of eight predictions for 2018 “Target is the ideal offline partner for Amazon for two reasons, shared demographic and manageable but comprehensive store count.”
It’s an idea that would have been laughable just a couple of years ago. While few could argue that Amazon isn’t the king of e-commerce, moving into the brick-and-mortar world wasn’t quite Jeff Bezos’ milieu.
In light of some recent acquisitions though — not the least of which was buying grocery chain Whole Foods Market — the idea doesn’t seem far-fetched at all today. More important, to current Target shareholders, such a deal may be the last bastion of hope for a graceful exit of an increasingly-troubled trade. Munster also thinks, should a deal go through, Amazon’s offer would be on the order of 15% more than the current per-share price of TGT stock.
With that as the backdrop, there are more arguments in favor of this proposed pairing then Munster laid out.
The Theory Passes the Smell Test
Calling a spade a spade, as yours truly suggested in November, there’s just not room for a Wal-Mart Stores Inc (NYSE:WMT) and an Amazon.com and a Target on today’s mass-market general merchandise retail landscape. The two biggest players in any arena fight each other so violently, they tend to squash other competitors without even really thinking about it. Target’s recent results suggest it’s becoming this type of victim. While Wal-Mart and Amazon are demonstrating revenue and earnings growth, Target isn’t.
A great deal of that stagnation TGT stock holders have been forced to digest stems from the fact that, try as it might, the company just isn’t keeping up with Amazon’s online strength, and Walwart’s rapidly-improving online presence.
Part of that improvement is the result of better funding. Amazon will stop at nothing to better understand its online customer, and Walmart allocated $2 billion over a year ago to cultivate its e-commerce machine … $2 billion that Target couldn’t spend to match WMT stock’s investment. It’s not just that the two bigger rivals are spending more to be better though. It’s that the two biggest combatants in the arena are also asking and answering the most relevant questions that Target isn’t. Chief among them is, “What do we do with all of this customer data we’ve gathered?”
The answer is, of course, build a better omnichannel machine, which seamlessly melds the offline and online shopping experience.
And that’s where Amazon could do something for Target that Target can’t quite do for itself. Moreover, that’s where Amazon could take aim at Wal-Mart in a way that Target couldn’t compete with Wal-Mart. Target has a strong-enough brick-and-mortar presence that, in the right hands and supported by the right technology, could pose a real threat to Wal-Mart before Wal-Mart’s budding turnaround effort was allowed to reach critical mass.
And make no mistake — Amazon has no fear of wading deeper into brick-and-mortar and house-branding waters. It has partnered with Kohl’s Corporation (NYSE:KSS) in what some say could be a precursor to a buyout, it’s opening its own bookstores at a surprisingly brisk pace, and it’s already selling a stunning amount of its own private-label goods.
The next natural, progressive step for Amazon would in fact be taking control of a means of physically distributing those goods, and at the same time establish a network of data-gathering centers … Target stores. These could also serve as mini distribution centers, facilitating more same-day deliveries that are becoming increasingly demanded by consumers. Adding more same-day delivery markets and eligible products would be another jab at Wal-Mart.
From this perspective, Amazon would be making a mistake in not buying Target.
Bottom Line for TGT Stock
Caution is advised, of course. Analysts predict far more acquisitions than ever materialize, so if your interest in TGT stock is limited to its potential as a buyout candidate, you might want to rethink things.
If nothing else, at least acknowledge the fact that the Target stock dividend yield of 3.8% is solid by retail standards.
On the other hand, for investors with a speculative streak, there are certainly worse buyout bets to make. Compared to some of the other deals Bezos has been willing to make, wading into mainstream retailing actually seems a bit more normal … and even potentially fruitful.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.