Yesterday was a big day for Amazon (AMZN, Financial). It announced that it had acquired PillPack, an online pharmacy that delivers medicine right to your door, and that it was offering delivery franchises to roll out the prime service in local communities around the U.S.
Once again, the darling of Wall Street received little scrutiny over its plans, as the news alone was enough to wipe out close to $20 billion in market value from six companies in leadership positions across three industries.
Delivery and logistics
FedEx Corp. (FDX, Financial) was down 1.32%.
United Parcel Service (UPS, Financial) was down 2.31%.
Retail pharmacy
CVS Health (CVS, Financial) was down 6.11%.
Walgreens (WBA, Financial) was down 9.94%.
Drug distribution
Cardinal Health (CAH, Financial) was down 4.87%.
McKesson (MCK, Financial) was down 8.83%.
Investors may realize that FedEx and UPS have other customers beside Amazon, but according to analyst estimates, Amazon accounts for 5-10% of UPS revenue, while FedEx has said the e-commerce giant accounts for less than 3% of its sales. In either case, both could trade lower as Amazon Prime vans hit the streets.
More importantly, living up to the speculation, it looks like Amazon was simply trying to find a backdoor way into the pharmacy business, and it’s done just that with PillPack. However, even PillPack has to get its pharmaceuticals from a middle man. Amazon will likely look to be that middleman and hope that through sheer volume it can make money in this business.
That is a big risk, especially with CVS and Walgreens already offering in home delivery. Getting into the drug wholesale business is even riskier because the margins are ridiculously low and if its gross margins fall below 20, the company could have a really hard time fueling its future growth.
As this story unfolds and Amazon begins to execute on its ambitions in these areas remember that Amazon doesn’t need to make money for its stock to continue to rise. That’s a scary proposition for any competitor, even industry leaders. On the other hand, this will be great for consumers who will either see better service from their current providers or with Amazon.
Amazon.com Inc.
Market cap: $825 billion
Annual sales: $193 billion
Annual profit: $3.9 billion
The six industry leaders
Market cap: $321 billion
Annual sales: $783 billion
Annual profit: $23.77 billion
For value investors, this is a micro example of being greedy when others are fearful. Fear pushed these six stocks down yesterday, giving people a larger margin of safety in each. I continue to be skeptical of Amazon from an investment standpoint, as it will eventually bump into a ceiling on growth and have to generate profits. For now, it is helping make other stocks better bargains.
Disclosure: I am long CVS.
