The stock of e-commerce giant Amazon Inc (NASDAQ: AMZN) opened with a positive gap on Friday and gained $23.54 to close at $987.71. The main reason for the uptrend is the announcement of the $13.7 billion acquisition of Whole Foods Market (NASDAQ: WFM), a retailer of natural and organic foods. Speculation is ripe that the buyout offer would trigger a bidding war. However, considering the fact that Wholesale Foods have accepted to be acquired by Amazon for $42/share in cash, we believe that the stock of Amazon would continue to move in the bullish orbit in the weeks ahead.
If the acquisition of Whole Foods goes through as planned in the second half of 2017, then it would establish a new chapter in the US grocery business. The stock of several food and home product retailers, including Wal-Mart and Kroger, declined sharply as the market was quick to understand the extent of damage the acquisition would create on their cash flows.
The market, in the meanwhile, pushed the stock of Whole Foods above the acquisition price. Other retailers could very well see synergies of $600 million from the acquisition. Thus, analysts at Barclays believe that some retailers may create a bidding war to avoid Whole Foods from falling into the hands of Amazon. At the least, they would prefer to make the acquisition costlier. Considering this, Barclays issued a price target of $48 per share, while Oppenheimer gave $45 per share for the stock of Whole Foods. Furthermore, Barclays stated that the price may hit a high of $57 per share in case other retailers try to outbid Amazon.
Whole Foods stated that it would function as a separate entity, following the acquisition, and continue to source from its trusted vendors around the globe. Furthermore, John Mackey will remain as the CEO of Whole Foods, and the headquarters will stay in Austin (TX).
Amazon has already begun delivering groceries to several cities in the US. It is also experimenting with a checkout-free concept store (Amazon Go), which allows Prime members to shop and leave while being billed automatically through next-generation sensor technologies.
The acquisition of Whole Foods, which has a considerable presence in urban centers, is expected to assist Amazon in its food delivery business. Likewise, Amazon’s technological expertise would support Whole Foods. With this acquisition, Amazon will certainly increase its market share.
According to analysts at Cowen, Amazon will be the 9th largest grocery retailer by the end of this year. By 2021, Amazon is expected to become the third-largest retailer, next only to Walmart and Kroger. Recently, Cowen analysts raised the price target of Amazon to $1,125, from $1,100 per share.
Technically, the uptrend remains intact as indicated by the pink-colored trend line in the image below. Additionally, the stock is also forming an ascending triangle. The rising accumulation/distribution indicator confirms the underlying buying pressure and the possibility of a breakout above the trading range.
To gain from the uptrend, we wish to purchase a call option expiring in one week. While setting up the trade, we would target a strike price of about $990 in the cash market.
Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.
