Amazon is playing chess while everyone else is playing checkers

June 20, 2017

 

Amazon's recent buy of Whole foods for 13.7 billion dollars cash at 42 bucks a share is the smartest move so far this year. Here's why:

 

-Long term: Organic is the future of grocers everywhere. CEOs and executives know that consumers are becoming increasingly concerned with health, and diet is key to the way they manage their bodies. With that in mind, it is simply a competition of prices between large-scale grocers such as Costco, Kroger, and Whole Foods in a effort to gain attraction for the new grocery shopping era. If this deal is completed (and I will talk about the IF part later), Amazon, with their growing cash supply, now has the ability to cut Whole Food's prices to a point where it is fiscally impossible for grocers like Kroger and Costco and others to compete. This "monopolization" of the organic future puts Amazon in a position to be the first company (of which I can recollect) that can generate two revenue streams from two top 5 businesses (Amazon.com, Whole Foods). 

 

However, since WFM was up to $43.22 a share today, there has been speculation that Amazon could be facing a "bidding war" for Whole Foods (Amazon paid $42 a share for Whole Foods, and usually a stock finds resistance at that buyout price. So, when a stock goes above that price and holds its gains, out comes rumor that other companies are interested in buying out said stock, in this case WFM). If a bidding war happens, here is how I would play it:

 

-If WFM goes up again tomorrow, I think that there is a confirmed bidding war at place. If so, you should trade WFM in a 2-4 week span. As prices like "$50" or "$60" come up as potential buyout prices, WFM stock is going to rocket. And, as it goes, resistance becomes support depending on where the stock heads. So, in this case, buy WFM (if there is a bidding war) around $42 and sell on the first rumored buyout price. 

 

How does that benefit Amazon? Well, if some other company like Walmart buys Whole Foods, Amazon still has its behemoth of an e-commerce business and cloud service business and other platforms to rely on. Essentially, this deal, whether it fails or not, presents no risk to Amazon but its competitors. 

 

SUMMARY

-If the deal goes through: Buy and hold Amazon, Buy and hold Whole Foods

 

-If there is a bidding war: Buy WFM around $42, Sell the rumored buyout prices

 

 

Read our disclaimer to better understand how we just provide information and opinion that is up to you to be acted upon.

 

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