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Stock Analyst Update

Amazon Pharmacy Unlocks New Growth Opportunities

We believe the company has an opportunity to improve on existing mail-order prescription platforms.

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The announcement of Amazon Pharmacy (AMZN) a (a two-day prescription delivery plan available to all Prime members in 45 states) and the Amazon prescription savings benefit to Prime members should not come as a surprise, as they represent the logical next step in wide-moat Amazon's broader healthcare category. The move follows the 2018 acquisition of PillPack (which will remain a stand-alone service for customers managing multiple daily medications), Haven Healthcare (the employee healthcare partnership between Amazon, Berkshire Hathaway, and JPMorgan Chase), and Amazon Halo (a healthcare monitoring system) and should make Amazon a more significant healthcare player over time. We're not planning to change our five-year assumptions (22% average annual top-line growth, operating margins between 9% and 10%) or our $3,600 fair value estimate based on this development but see the move as strategically important for several reasons.

First, the U.S. pharmacy market--we estimate retail and mail pharmacy is roughly a $75 billion market--presents a large opportunity for market share, even if acquiring customers takes time for Amazon. Second, it represents a new source of customer data that could be used for cross-selling opportunities both online and in physical stores, especially as Prime members age into peak prescription ages. Third, we believe Amazon has an opportunity to improve on existing mail-order prescription platforms--especially when coupled with the Halo digital platform--which could unlock higher-margin subscriptions/pricing tiers and lead to inroads in other business-to-consumer and business-to-business opportunities (making Amazon Business a more viable partner for medical, dental, and veterinary enterprises). Finally, we continue to see a foundation for a third-party healthcare-services marketplace, which could be margin-accretive for Amazon (much like its third-party seller marketplace).

 

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R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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