Sell Target Corporation Stock Into Strength as Amazon Takeover Unlikely
Renowned analyst Gene Munster made some waves when he predicted that Amazon.com, Inc. (NASDAQ:AMZN) would buy Target Corporation (NYSE:TGT), and TGT stock has rallied on Munster’s assertion. However, such a deal is unlikely to materialize for several reasons, and investors should sell their shares of TGT stock into strength.
The crux of Munster’s thesis appears to be that Amazon needs to buy Target to appeal to mothers. However, one of Amazon’s greatest strengths is its ease of use, and I know people well into their 60s, including many mothers, who use Amazon.
I’m 41, and my generation, including all of the mothers my age, is quite internet savvy and very capable of using Amazon. Even the vast majority of people in their 50s use Amazon regularly. Of course, five to ten years from now, a much greater percentage of mothers in their 40s, 50s and 60s will be avid Amazon users.
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Amazon’s greatest limiting factors have nothing to do with age, gender or motherhood. Rather, its greatest limitations relate to vertical markets and delivery time.
Most people currently do not use Amazon to buy their prescription drugs or furniture. Similarly, the company has not been able to convince consumers to find contractors via Amazon, as Craigslist is still dominant in that area.
Amazon’s results and Amazon stock would get a big boost if the company was able to extend its tentacles into those vertical markets. It may be able to do so through acquisitions.
For example, buying a drugstore chain like Rite Aid Corporation (NYSE:RAD) could enable Amazon to become a successful prescription drug retailer. While acquiring Craigslist could jump-start its contractor business, and buying Wayfair Inc (NYSE:W) could make Amazon a top furniture retailer.
Amazon’s other most important limitation is delivery time. As I wrote in December 2015:
“One of the few remaining advantages that brick and mortar retailers have over their online counterparts is speed. For the most part, any consumer who has to make a last-minute purchase currently does so at a brick and mortar retailer.”
Amazon has made some progress in closing the gap between itself and online retailers when it comes to speed, but it appears that customers still have to wait at least one day to receive many if not most products they order on Amazon.
By investing in faster delivery service, Amazon can eliminate the speed advantage that brick-and-mortar retailers still have, meaningfully raising its market share and the price of Amazon stock in the process.
Finally, even if Amazon wanted to acquire Target, it probably would not be able to do so because the Trump administration would not approve the deal. As I stated in August, President Trump is upset at Amazon CEO Jeff Bezos and is looking for ways to hurt the e-commerce giant. In December, the president again directly and harshly attacked Amazon.
The administration’s efforts to block the AT&T Inc (NYSE:T) takeover of CNN owner Time Warner Inc (NYSE:TWX) shows that it will take actions to hurt the business entities it perceives as enemies.
Although Munster noted that Wal-Mart Stores Inc (NYSE:WMT) would still have a larger market share than Amazon after a Target takeover, I believe that Target is large enough to give the administration an excuse to block any takeover by Amazon.
Contrary to Munster’s assertion, Amazon does not have a huge “moms” problem. Its biggest problems are its weak performance in a number of vertical markets and its delivery time. By improving its performance in its weak vertical markets and delivering its products more quickly, Amazon can greatly improve its results.
Bottom Line on TGT Stock
Finally, the Trump administration would likely block any acquisition of Target by Amazon. Anyone who buys TGT stock hoping for an acquisition will likely be sorely disappointed in the end.
As of this writing, Larry Ramer did not own any shares of any of the stocks named above.
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