Why Amazon's $4 billion acquisition is shaking up healthcareAug 02, 2022
Look, this is going to be a pretty in-depth analysis since we’ve never initiated a position in Amazon before.
But we really can’t help but go long on this one.
Because, since Amazon’s core e-commerce business is getting absolutely hammered by COVID and endless issues with global supply chains, Amazon’s value has dropped so low that you’re basically just buying the value of Amazon Web Services and getting the e-commerce business for free.
That sounds like an overstatement, but that’s how meteoric AWS’s ascendance has been, and how badly retail-at-large is getting hammered right now.
Let’s get into the specifics.
And hey, maybe we’ll even get a chance to talk about healthcare below👇
I mean, look at the chart above. It’s a tough time being Amazon, especially with how much they returned to investors from 2020 into 2021. Amazon and the rest of e-commerce basically were the economy during the depths of COVID lockdowns.
And now, supply chain mayhem and energy price inflation have taken that same stock and slammed it downward. Sure, Amazon is still the 5th most valuable company on earth — but the stock has definitely seen better days and we’ve definitely got more retail headwinds ahead of us.
But like we said in last week’s Microsoft update (see it here), Amazon’s valuation honestly has very little to do with the e-commerce business. It’s all about Amazon Web Services and Cloud.
AWS is Unbeatable:
The dynamics between AWS and Amazon eCommerce are a little different than the situation over at Microsoft.
The main difference is simple: Azure is driving growth for Microsoft’s core business, while AWS has very little to do with Amazon’s core retail side.
So instead of driving value — AWS is almost literally CARRYING the rest of Amazon. AWS is accounting for 150% of Amazon’s operating profits right now.
I.E. It’s the only scaled revenue contributor of Amazon that is profitable right now.
And while revenue growth is stalling out at around 40% YoY (just like Microsoft’s Azure platform) AWS is still seeing significant operating margin growth in the 30% range. Even when Amazon shoves tens of billions of dollars into AWS, it gets about $1.30 back for every dollar.
AWS is growing on the back of new adoption and gobbling up the market share of smaller players outside the next two largest competitors — Microsoft and Google, respectively.
But while AWS has helped Amazon's e-commerce operations become more streamlined in some cases — AWS doesn’t fit that much into a lot of the other business segments at Amazon. Which is one of many reasons why you saw a large cohort of analysts push for Amazon to spin AWS into its own publicly traded company across the last five years.
Because the valuation of AWS unencumbered by a very expensive (both in real and human capital) e-commerce business would be absolutely meteoric.
But we’re starting to really like the idea of AWS staying under the larger umbrella of Amazon for one key reason.
But before we get there—
What’s the deal with Amazon retail?
Amazon Core E-commerce is Hurting BAD:
The wildest thing looking through Amazon’s financials is looking at revenue growth on the eCommerce line. Sure, Amazon is famous for its historic level of unprofitability fueled by an unparalleled level of access to cheap capital back during the golden years of our most recent bull run.
But Amazon was on a strong path to consistent positive margins on the e-commerce side as its scale became more manageable pre-COVID.
Then some dumb virus completely nuked our global supply chains — briefly sent Amazon’s e-commerce revenue growth into the ionosphere, and gradually started making every single thing on earth more complicated and expensive and slow to produce.
Amazon's core sales only have increased 7% in North America while declining 6% internationally while operating expenses have exploded by 17%.
This has more to do with inflation and foreign exchange issues that can be tied back to supply chains than anything else. Amazon in the past has gotten away with not being profitable by consistently growing its total revenue while keeping expenses in check.
But in-store retail has surged as the world has essentially decided to ignore COVID—while e-commerce is getting left behind worldwide.
But these are temporary headwinds while energy prices stabilize and supply chains recover. These numbers don’t reflect bad management, they reflect some of the wildest macro pressures placed on large companies in history.
So the short of it is, that Amazon’s core business is being devalued to almost the same extent AWS is being valued. When you buy Amazon stock at its current price — you’re only really paying for the revenue growth at AWS.
The title of this article is not clickbait or hyperbole. You’re basically getting Amazon Ecommerce (and Amazon Studios, and their advertising business that’s bigger than Twitter and Pinterest and half a dozen other powerful companies) as a free gift with the purchase of an AWS stock.
But like we said before, it’s not only for valuation’s sake that we’re glad that AWS is in Amazon’s stack. We’re also really excited that AWS is about to serve a way bigger purchase.
Amazon is FINALLY Disrupting Healthcare:
That’s right. A few weeks back Amazon announced their $3.4 Billion acquisition of OneMedical, a kind of premium primary care service that’s been at the forefront of building a new paradigm in healthcare.
We’ve liked watching traditional healthcare get disrupted by innovations at United Healthcare and CVS. But now the big boys are getting involved.
The $3 billion Amazon paid for One Medical is a steal because Amazon can slot them into their existing Amazon Care infrastructure, and expand from One Medical’s ~150 locations in 28 cities by taking advantage of Amazon’s footprint with physical retail locations like Whole Foods.
But if you’ve been paying attention to healthcare — then you probably have seen just how much people are trying to acquire as much data as possible.
Data is everything in health. That’s how Mark Cuban can afford to sell extremely cheap drugs out of his new online pharmacy Cost Plus Drugs.
It’s cool that Cuban can brand it as him using his billions to take on big pharma and make prescription drugs cheaper in America. But it’s way cooler that he can turn around and leverage those cheaper drugs as a loss-leader to amass a huge pile of wildly valuable medical spending data.
This is probably Cost Plus’ actual product — in the same way, that Robinhood’s actual product is the data (and subsequently PFOF) from the trades you make on their app.
Beating the massive draconian and under-innovated healthcare industry is going to take HUGE datasets and efficient computer networks to analyze and capitalize on those networks.
Why One Medical:
So Amazon now has the opportunity to take one more leg of the healthcare industry—OneMedical—and plug it into the data pool at AWS.
Cloud computing gets wilder every year y’all. AWS is a system that gets smarter and more efficient the more customers use it (if you can tolerate how badly we’re oversimplifying here).
OneMedical is another critical arm of the healthcare industry that Amazon can optimize with their nation-state level of computing power. This will help Amazon cut costs, streamline services, and set them up for even bigger moves in the healthcare space.
One of the biggest pieces of the healthcare pie Amazon can disrupt the most is insurance — but at this early stage, it’s hard to tell if Amazon would build an in-house insurance arm or pull a massive acquisition to complete their healthcare empire.
But that’s irrelevant for Amazon’s growth this year. Right now healthcare is looking to be about a $4 Trillion industry—and an upscale primary care network like OneMedical will probably only be able to pull in ~$200 Billion of that valuation if most things go right.
It’s really funny writing analysis at this scale and having the gall to say Amazon will “only” pull in 200 billion dollars off of its $3.4 billion investment. But that’s what happens when you write about leviathans like the American healthcare system.
That is to say — a lot has to go right with how Amazon plans to utilize OneMedical. But it’s pretty much a steal at $3.4 Billion and a HUGE part of what excites us about Amazon’s next 5 years of growth.
So, in 2022 Amazon is a massive data business that’s propping up a beaten-and-bruised retail business.
Amazon has clearly accepted that we’re in a difficult macro environment—but a temporarily difficult macro environment—and is using that as an opportunity to leverage its strengths to diversify into industries desperately in need of disruption.
With the value of Amazon’s retail arm only mildly unprofitable during the biggest supply chain crisis in history and Amazon’s advertising, cloud, and media arms all expanding their revenue growth and profit margin and a sea-change in healthcare on the horizon—the next 5 years are going to be fascinating as Amazon makes its final transformation into an everything company.
It’s going to be a wild time.
We’re really excited that this is the moment we’re getting on the ride.
Price Target: $160 (33% upside)
Current Price: $120
Target Date: Q2 2023
Risk/Reward: High / High
Market Cap: $1.2T
Dividend Yield: 0%