Dear Mr. Berko: In January 2015, I bought 300 shares of Amazon at $342 a share, and it just kept going up and up. I never thought Amazon could rise so much that quickly. This year, my shares increased by more than 300 points, and I’m very nervous because I have such a large profit and could lose it all if the company’s earnings were to fall or if the stock market were to crash as lots of people are predicting. Is the Whole Foods purchase good or bad for Amazon? I’m told it’s not a good deal. Please tell me whether I should continue holding or I should sell Amazon. — PS, Rochester, Minn.
Dear PS: Amazon’s $13.7 billion purchase of Whole Foods Market — with its 450 upper-income prime store locations — was its largest acquisition ever. It either was a brilliant move or may be known as Amazon CEO Jeff Bezos’ Waterloo. Those who doubt Amazon’s (AMZN-$1,001) strategy note that groceries are a dreadful, low-margin business. But this acquisition is not about food, per se; rather, it’s “about food as a delivery service,” in The Atlantic’s words. And Jeff is banking on a concept called “consumer convenience,” which many retailers, especially big-box stores and semi-big-box stores, can’t grasp. Jeff recognizes that American consumers are slothful and enjoy couch potato-hood. Americans don’t want to fight annoying traffic jams and then squeeze their new cars into increasingly smaller parking spaces. Americans don’t want to spend 17 minutes wandering Bed Bath & Beyond’s aisles searching for a pillow and then stand in line for seven minutes to complete the purchase — or 11 minutes because the credit card belonging to the idiot in line ahead of them is out of juice. Then OMG, they have to battle the traffic returning home.
Though Jeff sells convenience, many believe that his WFM acquisition will fail because of terribly low margins and highly perishable products. They figure that if Jeff reduces prices and then adds a delivery fee, this venture is certain to lose money. And he may also lose revenues because impulse purchases account for an estimated 22 percent (this estimate may be considered low) of grocery purchases. However, along with the purchase of WFM, Jeff also acquired 450 distribution centers for everything AMZN sells. Some believe that WFM’s urban and suburban locations are uncommonly useful for AMZN’s national delivery service. Their reasoning suggests — even if WFM stopped selling groceries — that the merger price was cheap. AMZN merchandises convenience to indolent Americans. Even driving to a movie and parking is inconvenient for many Americans, which is why Netflix has become so popular, with 104 million streaming members in the U.S.
AMZN, with an expected $160 billion in 2017 revenues, should earn $5.80 a share this year. And next year, on anticipated revenues of $191 billion, AMZN could earn $11.80. This huge leap in earnings would be made possible by an anticipated 70 percent increase in net profit margins, from 1.7 percent this year to 2.9 percent in 2018. AMZN-watchers believe that Jeff could grow revenues to $320 billion in the next four years, with anticipated net profit margins of 4.1 percent, and produce earnings of $27.60 a share. Incredible!
AMZN doesn’t pay a dividend, and I doubt it will, though some believe that the board will declare its first dividend just before Thanksgiving in 2023. Since you bought AMZN at $342, those shares have nearly tripled. AMZN traded as high as $1,080 this year. But though I’m confident that revenues and earnings will continue to zoom, some watchers, such as Morningstar, reason that AMZN’s share price won’t rise much over $1,200. And analysts at Market Edge, Raymond James, Pacific Crest Securities and Wolfe Research have downgraded the shares. Highly respected and frequently followed Zacks Investment Research has an outright “strong sell” recommendation. In a well-written seven-page research report, Zacks lists and clearly discusses seven reasons it issued that recommendation.
You have a ginormous profit of some $180,000, and your taxes on the sale could be ginormous, too. Consider selling 150 shares at the market. Keep the remaining 150 shares, but put an open stop-loss order at $895.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected]