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Don’t Count on Amazon to Save Rite Aid Stock Just Yet

Rite Aid stock could double or triple from here, but it's unlikely to do so

One of my favorite things to do in the market is buy the dip in beaten up and undervalued stocks, but, only when doing so makes sense. When it comes, the reality is that buying the dip in Rite Aid (NYSE:RAD) simply doesn’t make sense right now. Rite Aid has a long way to go.

Don't Count on Amazon to Save Rite Aid Stock Just Yet
Source: Shutterstock

The fundamentals are broken. The chart is broken. Investor sentiment is dour. There has been C-suite turnover. And, above all else, the outlook for a turnaround remains as bleak today, as it’s ever been.

As such, the most likely path forward for Rite Aid is lower revenues, lower profits, lower margins, and a lower stock price.

To be sure, there is a pathway here through a unique Amazon (NASDAQ:AMZN) partnership wherein RAD stock turns into a multi-bagger from current levels. But, that pathway lacks visibility and tangibility here and now. Until that pathway gains visibility and tangibility, Rite Aid stock isn’t worth the risk.

As such, the investment implication with RAD stock is crystal clear. First, sell now and stay away for the foreseeable future. Second, monitor the company and see if the Amazon catalyst does boost the numbers next quarter. Third, if it does, buy into the rebound. If it doesn’t, continue to stay away until it does (if ever).

Stay Away From Rite Aid Stock For Now

The big picture reality here is that Rite Aid is a broken company with very dour go-forward growth prospects.

At one point in time, Rite Aid was a large pharmacy plus convenience store with a wide reach and busy stores. That was before the ecommerce era. Now, consumers can basically get everything they got at a Rite Aid 20 years ago, from Amazon, Walmart (NYSE:WMT), or CVS (NYSE:CVS) today, without ever having to leave their homes and probably at lower prices, too.

Even further, because Rite Aid has struggled significantly over the past several years, the company has been left consistently cash-strapped. That means the company hasn’t put as much money back into its stores or operations as peers.

The result? Two-fold. One, Rite Aid’s stores often look outdated next to Walmart or Target (NYSE:TGT) stores, which now have self check-out kiosks. Two, Rite Aid’s e-commerce business isn’t as built out as peer e-commerce businesses.

As such, Rite Aid is the laggard in the pharmacy retail world today. Given its lack of resources, Rite Aid stock projects as the laggard for the foreseeable future, too. That means revenues will keep dropping. Margins will suffer from that loss of revenue scale. Profits will consequently drop more.

As go profits, so go stocks. Thus, so long as this profit erosion trend remains in place, RAD stock will likely continue to slide lower.

The Amazon Catalyst and Rite Aid Stock

The bull thesis on RAD stock centers around a recent partnership with Amazon sparking a reversal in the current profit erosion trend at Rite Aid.

This could happen. Rite Aid recently became a “fulfillment center” of sorts in Amazon’s rapidly expanding distribution. That means Amazon customers can now pick up their orders in Rite Aid stores, which further means that Amazon customers will start going into Rite Aid stores.

That’s big, mostly because shoppers don’t typically go into Rite Aid stores. Rite Aid’s core shopper base is 55 & up and makes less than $40,000 a year. shoppers, on the other hand, skew young and rich aka, not Rite Aid shoppers.

Most of these shoppers will likely walk into a Rite Aid store, say why would I ever shop here, pick-up their orders, and promptly leave. But, some of them could stick. That is, some will walk in, see something they like in the Rite Aid store (maybe Thrifty ice cream) and start shopping at Ride Aid with greater frequency.

That’s a long-running tailwind. Those shoppers are young, and their purchasing power is only going up. Thus, if some of those shoppers start shopping at Rite Aid in greater frequency, Rite Aid’s revenues, margins, and profits will set out on a secular, multi-year uptrend.

If that happens, RAD stock could be a multi-bagger from current levels, but, that’s a big “if.” As such, investors are best to wait for confirmation that this is happening, before taking a bet on a stock that has been a falling knife for several years.

Bottom Line on Rite Aid Stock

I don’t think all hope is lost for Rite Aid stock. Instead, I do think that the Amazon partnership could spark a huge fundamental trend reversal which ultimately causes RAD stock to double or triple from current levels.

But, I also peg the likelihood of that reversal materializing at “very low.” As such, the best thing to do here is to sell RAD stock and stay away until the numbers confirm that the Amazon partnership is providing a meaningful boost to Rite Aid’s numbers.

As of this writing, Luke Lango was long AMZN, WMT, CVS, and TGT. 

Article printed from InvestorPlace Media,

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