Amazon Flash, March 2018

It’s about time.
From Friday’s Wall Street Journal: “Walmart is in preliminary discussions to buy Humana…While Walmart has long been a dominant pharmacy player, a deal would push it into new business lines. Humana manages private Medicare insurance plans and owns its own pharmacy benefit management business. One obvious rationale lies beneath these talks: Retailers have an urgent need to maintain foot traffic. Pharmacies can help.”
The President’s recent comments about Amazon – or many of the other things he tosses about on a regular basis – can have short term impacts on the price of the stocks caught in his crossfire. His comments also raise legitimate questions about what is happening in the world; not just with Amazon or Facebook, but also about how business, in general, is behaving and what strategic steps they are taking to drive their respective businesses forward.
Amazon is the third largest company in the world because it is well run and continues to grow its business in multiple parts of the economy that touch millions of peoples lives daily. Most companies want to grow as fast as Amazon (I bet we would all like to be the richest man in the world like Jeff Bezos, CEO of Amazon – someone has to be). Walmart was like Amazon but that was a long time ago. It’s not that Walmart is an unattractive investment – that’s not our argument – but it’s that it is only now thinking about ways that it can deploy its capital in ways that earn an attractive return and can compound for many years. That Walmart had to feel threatened by someone else before thinking about smart things to do with all of the cash flow that they’ve been earning for decades calls into question what management got paid for.
That’s why we find investing interesting. The current narrative of concern about how size and success, the types of which companies like Amazon are enjoying and Walmart did in the past (if you get the irony); are now characterized as monopolistic and as a result, such behaviour is stifling innovation and competition. Or in reality, is it more about how poorly some businesses have been run for so long?
The massive size of mergers and acquisitions today speak not only to the inflation of asset prices of past years in spite of mediocre profit growth and the still low levels of interest rates but also the reawakening of animal spirits and creativity as businesses slowly awaken to the fact that financial engineering alone will not solve their problems.
The business world is awakening to a new world where the successful will get larger and there will be fewer players. Business now views us consumers as a one-stop shop. They want all of our dollars and they will do anything to aggregate as much of your consumption as possible by offering you everything. Business is now thinking about what it can do to make your life better by the service and ease by which you hand over your savings. Sounds like innovation to me.
The question now for the people is: do we care if one company, because of its leadership, is allowed to dominate? If one company delivers much better value because of innovation, should we destroy that by aiming for a lower common denominator? That may sound a bit extreme and in some ways, it is to make a point. Have we finally reached a happy point today where all the resources (low interest rates, ample money, high valuations, receptive regulators) are available for all competing companies (like Walmart) and they finally start doing something to compete against Amazon? Or does the government need to step in and do their job for them? It’s an interesting question for a Republican President and a nation that rewards success.

Thank you for reading,

John O’Connell and the Davis Rea Team

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