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AMZN wiped out more than $11 billion in value from these 3 stocks in one day. Is the deal that did it that disruptive?

AMZN wiped out more than $11 billion in value from these 3 stocks in one day. Is the deal that did it that disruptive?

Yesterday the investors woke up with news that Inc. (AMZN) had acquired Pillpack, a small, startup online pharmacy that packages, organizes and delivers presorted medication doses. The move marks AMZN’s official entry into the pharmacy business, something that the company has been rumored to be ready do for more than a year. Some experts, however had speculated that any significant news on this front would be years in the making as AMZN built up its pharmacy profile organically. As of last October, reports said Amazon had received wholesale pharmacy licenses in 12 states, apparently bolstering the idea that it would take AMZN time to make a significant dent as a new player.

If you’ve been paying attention to AMZN at all for the last couple of years, and to the broader market, you know that AMZN is a disruptor in multiple ways. The mere rumor that they could be interested in finding a foothold into a given industry seems to be a reason to dump the stocks in the industry the rumor is about. If there is actual, verifiable news, the shockwaves tend to be even more significant. The news, for example, that Nike (NKE) had forged an agreement to market its products directly through AMZN sent a large number of other national retailers, including clothing, footwear, and sports equipment retailers tumbling. AMZN’s purchase of Whole Foods a year ago continues to have ripple effects as grocery and food stocks continue to scramble to identify ways to evolve their businesses to keep up.

The acquisition of PillPack had a similar, immediate effect on 3 major pharmacy stocks: Walgreens Boots Alliance (WBA), CVS Health Corp (CVS), and Rite Aid (RAD), driving the three companies down 9.9 percent, 6.1 percent, and 11.1 percent on the day. As usual, the reaction seems to be based more on the perception of the future threat more than a real, tangible and immediate problem. That’s doesn’t mean that the long-term risk isn’t real for these stocks, but investor response to news tends to be over-exaggerated, both to the positive and negative side of things, to just about anything it deems to be worth paying attention to. Until the news broke, PillPack was an up-and-coming player in the pharmacy business, but was more noted for its potential as an acquisition target than anything else. Walmsrt (WMT) was reportedly also negotiating to buy the company until AMZN came with with a larger bid. As a private company, there are no earnings statements to review, and so the market for now is using the company’s CEO statement in November of last year that they were on track to post about $100 million in revenue for the year as a benchmark.

So what does AMZN get? Most experts – including WBA’s chairman, who held a planned conference call on its quarterly earnings yesterday – agree that the deal is absolutely a “declaration of intent” on the part of Amazon. And given the company’s expertise in online commerce and supply chain management, I don’t there is any doubt they have the ability to scale and grow PillPack’s business as it now stands. I think the most important thing it picks up right away comes in the fact it gets immediate licenses to distribute drugs in all 50 states across the country, instead of working through each state individually and organically. Whatever AMZN’s other plans are for the pharmacy or healthcare business, clearing those hurdles in one leap should accelerate their plan in a significant way.

What are the risks for WBA, RAD, and CVS and their businesses? The market reaction in each case could be telling. Rite Aid took the biggest hit, and recently sold thousands of its stores to WBA and is looking for another partner for the ones that remain. It is a company that by all appearances is giving up the fight and won’t be around for much longer, and so this deal could just be one final nail in their coffin.

Walgreen’s has been aggressively expanding their store presence, having acquired more than 1,900 Rite Aid stores in March of this year. Including that acquisition gives them an estimated nationwide presence of more than 10,000 retail locations. That’s a massive footprint puts them a little ahead of CVS, and that isn’t going to be easy to dislodge. It’s also worth noting, as some analysts have, that the pharmacy business is “sticky,” which is another way of saying that consumers really tend to stay loyal to their pharmacy of choice. Changing a family’s pharmacy isn’t often a matter of choice because of that, and so companies like CVS and WBA that in many cases will have already earned that loyalty may not see as much erosion of that customer base as some might expect, at least in the near or even intermediate term.

CVS also has a massive presence, with aggressive and progressive plans about how they want to shape their future. Their plans to acquire insurer Aetna Inc. (AET) are still pending regulatory approval that will help them diversify their business beyond the limits of traditional pharmacies. A company spokesperson also noted on Friday that CVS already had the same kind of capabilities – multi-dose packaging, direct shipping from local stores or via online orders, and others – that PillPack offers. That seems to put them in a better position than either of the other two companies to weather this particular storm and stay competitive, even with AMZN’s disruptive presence looming.

In the short term, don’t be surprised if the market keeps beating up these stocks for the time being; the truth is that over the past year, the mere rumor of AMZN entering a new industry has put serious price pressure on just about any stock even remotely associated with that business. Investors will continue to fret and worry and wring their hands. That means that for these stocks, the downside risk for the time being is probably pretty high. Over the long-term, however, keep focusing on their fundamentals. Both companies are in pretty good shape from a fundamental and financial standpoint, and any near-term price volatility could just create an even more attractive value proposition than exists in them today.

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