Call it the “Amazon Effect.”
Yesterday was not a good day for many pharmacy stocks, which got blindsided by Amazon.com’s (AMZN) announcement that it was acquiring PillPack—a 2013 start-up that delivers medications by dose directly to patients, along with vitamins and other consumer medical supplies.1
When Amazon threatens to get into a business, the immediate reaction of some market watchers is to assume said business will go the way of the bookstore—the industry Amazon originally disrupted. The nearly 11% intraday drop by pharmacy stock Walgreens Boots Alliance (WBA), which was typical of many retail drug-related stocks yesterday, suggested that mindset was in full force:
But rather than wonder whether yesterday’s news means traditional pharmacies won’t exist in 15 years (who knows), the real question for traders is whether the market’s initial reaction was overdone—and if it presents an opportunity.
As luck would have it, there’s an analog to this situation that may be educational, and it happened just a few weeks ago.
In April, dating site operator Match Group (MTCH)—the people who bring you Match.com, Tinder, OKCupid, and other romance facilitators—was enjoying a strong uptrend that was taking the stock to record highs. Then, on May 1, news broke that a little company called Facebook (FB) was planning to launch a dating feature. MTCH shares got slammed for a nearly 27% loss over the next two days:
While Facebook has had a great run since then—rallying to records highs—the chart shows MTCH gained 27% between May 2 (the day after the announcement) and June 19. For traders with the intestinal fortitude to buy the break, it was indeed a great opportunity. Will Match survive and thrive long term, or will Facebook ultimately dominate the dating space? Who knows, but the initial MTCH sell-off was proved to be overdone in the near term.
The Match and Walgreens situations have their differences, to be sure. Match was in a solid uptrend before the news hit; Walgreens has been moving sideways to lower for almost three years. Also, Facebook’s “challenge” to Match was the announcement of its intention to develop a dating platform; Amazon’s challenge to Walgreens was the purchase of a company that can compete in Walgreens turf right now.
But the parallels remain. Despite Amazon’s track record, its entry into a market doesn’t automatically mean existing players will shutter their businesses. Dominance, even if it occurs, can take time.
One important lesson from the MTCH episode: The stock didn’t bottom the day the news hit. Prices fell the next day, too, then moved sideways for a few days before turning unambiguously higher—the same day the stock made a sharply lower intraday low (3% below the May 2 low).
Finally, lost in all the noise yesterday was WBA’s positive quarterly report, which beat earnings and revenue estimates, and reaffirmed the company’s $10 billion stock buyback program. Also, a LiveAction scan for unusual options activity (above) showed traders were buying WBA call options at more than six times the average daily pace (put option volume was within its normal range):
In other words, there was a lot of interesting WBA news hidden beneath the AMZN news.
1 MarketWatch. Amazon acquisition of online pharmacy startup PillPack sends health-care stocks into a nose dive. 6/28/18.
2 StreetInsider.com. Walgreens Boots Alliance (WBA) Tops Q3 EPS by 5c, Updates FY Guidance; Raises Buyback and Dividend. 6/28/18.