In case you forgot, Amazon.com is not just an online retailer. It has been making waves in various industries, and its latest move is shaking up the healthcare sector. Amazon has secured a portion of Blue Shield of California’s pharmacy-benefit management business, replacing CVS Health as the current provider. This development has sent shockwaves through the market, with CVS shares plummeting and Amazon’s stock remaining steady. With Americans spending over $630 billion on prescription drugs in 2022, this move has the potential to significantly impact Amazon’s bottom line.
While Amazon’s e-commerce arm and Amazon Web Services are well-known, the company boasts a diverse portfolio of businesses. From electronics like the Kindle, a movie studio, and the Amazon Prime streaming service, to grocery chain Whole Foods and an online ad business, Amazon has its fingers in many pies. This extensive range of businesses has contributed to Amazon’s enormous valuation, with shares currently trading around $135 and the company worth approximately $1.4 trillion. Despite its already impressive market value, some investors argue that Amazon should be valued even higher when considering each individual business separately.
One potential catalyst for Amazon’s future growth is its Amazon Web Services (AWS) division. Analysts and investors have been speculating about the possibility of an AWS spinoff, which could unlock long-term value for shareholders. While an AWS spinoff remains uncertain, investors who want to capture that value before it happens may find it worthwhile to invest in Amazon’s stock. With experts predicting a 40% annual growth in earnings for the next three years, Amazon’s price-to-earnings-to-growth ratio appears attractive. As the company continues to expand its reach into different industries, it will be interesting to see how these ventures contribute to its overall valuation and investor sentiment.
Contact: Al Root at allen.root@dowjones.com
Amazon Expands Its Healthcare Presence with Blue Shield Deal
In a move to lower drug costs, Blue Shield of California has chosen Amazon as one of its pharmacy-benefit managers, replacing CVS Health. This shift caused CVS stock to drop more than 10%, erasing $9 billion from its market capitalization. Amazon stock, on the other hand, remained flat. This foray into healthcare is not Amazon’s first, and it likely won’t be its last, posing a threat to pharmacy-benefit managers like Cigna.
Prescription drugs are a lucrative industry, with Americans spending over $630 billion on them in 2022, a 9% increase from the previous year. Pharmacy-benefit managers play a pivotal role in managing the complexities of prescription drugs, negotiating prices, and saving money for employers providing health benefits. Amazon’s entry into this market could significantly impact its business if it continues to win contracts.
The Blue Shield deal highlights Amazon’s diverse portfolio of businesses, which extends beyond its well-known e-commerce arm and Amazon Web Services. The company also operates in electronics, entertainment (through its movie studio and Prime streaming service), groceries (with Whole Foods), online advertising, and supporting third-party online sellers. This breadth of operations contributes to Amazon’s enormous valuation, with shares currently trading around $135 and the company worth approximately $1.4 trillion.
Some investors argue that Amazon should be valued even higher, considering its various businesses. These investors use a sum-of-the-parts (SOTP) valuation approach, which values each business separately. SOTP valuations gain traction when companies launch new businesses or undergo breakups. For example, Tesla’s partnership with Ford led investors to reassess the value of its supercharging network. Jim Osman, founder of stock research firm The Edge, suggests that Amazon’s true value could reach $200 a share when considering all its individual components.
While Amazon Pharmacy may not be the main driver of this valuation, Osman believes that Amazon Web Services (AWS) holds significant potential. There has been ongoing speculation about a potential AWS spinoff, which Osman argues would create long-term value for shareholders. While an AWS spinoff is not guaranteed, investors who want to capture this value before it happens may find it worthwhile to invest in Amazon.
In conclusion, Amazon’s expansion into the healthcare industry through its pharmacy-benefit management deal with Blue Shield of California signifies its ongoing diversification beyond e-commerce. The company’s entry into prescription drugs poses a threat to established players like CVS and Cigna. With its vast portfolio of businesses, Amazon’s valuation is already substantial, but some investors believe it could be even higher when considering its individual components. The potential for an AWS spinoff adds further intrigue to Amazon’s future growth prospects.
