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Matt Winkler
Matt Winkler
Articles (38) 

Costco Now Oversold in Response to Amazon's Whole Foods Offer

While Costco stock is down on the merger news, it is less threatened than Walmart

June 19, 2017 | About:

Remember the Amazon Fire Phone? If you do, you may recall it was discontinued just 13 months after launch. And if you do not, it only strengthens the point. That is, Amazon.com Inc. (NASDAQ:AMZN) can fail, especially in markets it is not familiar with.

It is a point many investors seem to forget, as the assumption across the board with Amazon’s $42 a share offer for Whole Foods Market Inc. (NASDAQ:WFM) is the e-commerce giant is about to change the face of grocery shopping forever. While that may end up being true, it does not mean other retailers will not adapt and grow as well.

The news caused Amazon’s competitors to plummet. Some with justification, but others less so. For instance, Costco Wholesale Corp. (NASDAQ:COST) fell over 7% on the news. Costco is a retailer that in many ways is the diametric opposite of Whole Foods. People pay membership fees for the ability to shop at Costco in bulk for all kinds of goods, not just groceries. People go to Whole Foods to pay a premium for smaller amounts of organic produce and obscure, gourmet health brands to feel like they are buying and being healthy. Whole Foods is often teased as “Whole Pay Check” for a reason and could not be further from Costco’s business model in terms of its target market.

While stocks like Kroger Co. (NYSE:KR) may have a reason to fret and fall at Amazon’s offer for Whole Foods, Costco’s selloff seems an overreaction and a presents itself as a good buying opportunity. The company is in good financial shape and has a very loyal customer base thanks, in part, to membership fees that keep shoppers coming back in order to maximize the value of their dues. They will not start shopping at Whole Foods even if it happens to be owned by Amazon, just like smartphone users did not flock to the Fire Phone just because of who developed it.

The other reason Costco is a good buy now is the talks between Amazon and Whole Foods may still break down. The fact the supermarket chain is already trading at a premium to Amazon’s offer of $42 indicates many investors believe its initial offer will not be the last. Otherwise, they would not buy it above the offer price and risk losing the difference.

Some analysts are looking at Wal-Mart Stores Inc. (NYSE:WMT) to swoop in with a higher offer for fear an Amazon takeover of Whole Foods could irreversibly damage the world’s biggest retailer. An Amazon challenge to the hegemony of Walmart makes more sense than Costco being in trouble over the same move. Amazon and Walmart are, of course, direct competitors for the same retail market. What Walmart has over Amazon now is mainly groceries. So if Amazon breaks into that market significantly, even through a high-end grocer, it could really threaten Walmart.

Essentially, Amazon does not threaten Costco as directly as it threatens Walmart. In addition, if Whole Foods goes with Walmart instead, it will not have added anything that directly competes with Costco anyway. Either way, the stock is due for a bounce when traders realize this.

Disclosure: Long COST.


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