Following Whole Foods Acquisition, Is Amazon On Its Way To A 'Competitive Moat'?

Amazon.com, Inc. AMZN recently completed the acquisition of brick-and-mortar grocery chain Whole Foods Market, Inc. Immediately after the closing of the deal, Amazon announced price cuts of up to even 43 percent at the Whole Foods locations.

As such, UBS has a Buy rating and a $1,200 price target on the shares of Amazon, while Loop Capital Markets initiated coverage of the company's shares, also with a Buy rating and a $1,200 price target.

Whole Foods Buy: A Buy Vs. Build Decision

Following its meeting with a former Amazon VP of Consumables & Amazon Fresh, UBS said online penetration within grocery/consumer packaged goods, or CPG, would continue to increase over time, with room for multiple winners.

Quoting the expert, UBS analyst Eric Sheridan said the Whole Foods acquisition was a buy vs. build decision that would help accelerate growth in the under-indexed consumables space, while also leveraging lessons learned from prior investments in the category.

Sheridan indicated, though not totally oblivious to profits in this category, Amazon will not be averse to investing in the near- to medium-term, with the focus likely to be on price, convenience and selection.

See also: One Secret Behind The Whole Foods Deal: Amazon Wants To Sell You All The Alcohol

Accordingly, UBS said CPG brands will have a choice to make going forward regarding, which distribution channel is to be used and what that would mean for pricing and volume.

UBS believes U.S. private label penetration will grow from high-teens to low-20 percent range over the next few years.

"Amazon's strategy related to private label is centered around increasing consumer choice (both price & selection in the context of value) by filling gaps within their offerings," the firm said.

The firm is also of the view that Amazon will be better positioned to leverage their fulfillment and logistics network, as it increases penetration within consumables. In line with the expert's view that Amazon will need at least four deliveries per hour in order for a delivery route to be profitable, the firm said it believes the company will continue to focus investments in logistics in areas with high income and population density.

This, according to the firm, will drive the unit economic hurdles needed for routes to be profitable significantly lower.

Amazon Has Many More Years Of Robust Growth

Loop Capital Markets analyst Anthony Chukumba sees many more years of growth ahead for Amazon, thanks to its e-commerce and cloud computing platforms. These two platforms, according to the analyst, stand to benefit from the ongoing secular shifts to online shopping and on-demand computing.

Chukumba indicated that the company's unique culture of continuous experimentation and "embracing failure" vests it with a powerful competitive advantage. Finally, the analyst sees the growing free cash flow and strengthening balance sheet providing Amazon with a competitive moat.

Related Link: Contrarian: Amazon Is One Of The Weakest Retailers There Is