Amazon Is a Buy on Dips, Whatever Whole Foods Does

Amazon (NASDAQ:AMZN) is due to report earnings April 25. Analysts expect about $2.3 billion in net income, or $4.72 per share. The hoped-for “whisper number” is $4.95 per share, almost $2.5 billion.

AMZN Stock: Amazon Is a Buy on Dips, However Whole Foods Does

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The key number will be the revenue number, expected to be $59.65 billion.

I’m guessing it will come in light.

The reason is Whole Foods, whose strategy doesn’t line up with Amazon’s. What happens at Whole Foods matters because the argument for Amazon stock is based on cash flow and growth, not on profits. Amazon has been growing at about 30% per year, even with its huge scale. Any slowdown is going to hit the stock hard.

And Whole Foods looks like a slowdown.

Amazon’s Whole Foods Problem

When Amazon bought Whole Foods in 2017 for $13.7 billion, it was an upscale retailer known to detractors as “Whole Paycheck.”

Corporate cultures clashed immediately, as Amazon sought to scale Whole Foods into a mainstream retailer, a high-volume outlet serving its Prime customers.

The result is illustrated in the Atlanta market, where the company’s original store in an upper-class suburb recently closed in favor of a multi-story outlet in a downtown skyscraper. The company also opened a suburban outlet under its low-cost “365” brand, which is now going away.

Amazon immediately began advertising “lower prices” at the new store, especially for Prime Members. I’m a Prime member, so I checked it out.

The prices are below those Whole Foods once charged, but they’re nowhere near those of Kroger (NYSE:KR), privately owned Publix or Walmart (NYSE:WMT), which dominate the Atlanta marketplace. Small hamburger buns that sell for $1.50 a pack at Kroger go for $3 at the new Whole Foods. It’s like breakfast at Tiffany (NYSE:TIF). Bring your own croissant and stand at the window.

There are some cool amenities, like a “vegetable butcher,” a bakery and a rooftop beer garden, but bargain hunters are going to be disappointed. This is still an upper-class store for upper-class foodies. The power of Whole Foods sales hit Amazon’s balance sheet in 2018. It’s likely growth in 2019 will be much slower.

What Amazon wants is for its Prime Members to order their groceries from Whole Foods and have them delivered via Amazon. For that change in habit to happen, it needs a much bigger, broader store network than Whole Foods now offers. Bananas are not books.

Amazon on All Cylinders

Over the longer run, Amazon is still great. Cloud revenues keep climbing and margins should be fine since over half of what’s sold at the website is owned by others. Amazon is once-again retreating in China, but that was never a big money-maker.

Amazon also has huge growth opportunities in front of it. Its credit card, currently managed by JPMorgan Chase (NYSE:JPM), should become just the opening wedge in an all-out assault on banking services from small business lending to mortgages.

Its joint venture in healthcare with JPMorgan and Berkshire Hathaway (NYSE:BRK.A) only has a name — Haven — but it should start with about 1.5 million accounts (the three firms’ employees and families), roughly 5 million total insureds. It looks to be copying the analytics-based strategies of United Healthcare (NYSE:UNH), which just reported record profits on revenue of $60.3 billion with almost 50 million customers.

The Bottom Line

For Amazon, it’s only top-line growth in the near term that’s threatened. The company chose to pay $13.7 billion for 2% of the U.S. grocery market when Kroger, which has 10% of that market, is valued at just $20.4 billion.

Over the longer run, Amazon still has an enormous runway for growth, and the assets to take advantage. But investors and reporters are fickle. A revenue “miss” could look much larger than it really is. If it does, consider any dip another invitation to buy this stock for the long run.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and JPM.

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