The Amazon Panic
An “Amazon Panic” describes a rush of selling in the stocks of companies potentially impacted by a new initiative from Amazon.com (AMZN). Invariably, the dust settles, the panic subsides, and buyers pick up the pieces. The whirlwind is a short-term, quick trigger reaction to a world shattered by Amazon. An Amazon Panic exploded across the pharmaceutical space two and a half years ago when the company acquired PillPack. Unlike previous episodes where the market realizes that Amazon will not take over the entire industry anytime soon, I insisted THIS time is different.
I told the story of my personal experience with GoodRx (GDRX) to claim that easy access to lower prices would undermine the business models of retail pharmacies. Fast forward to 2020 and GoodRx launches an IPO and in less than two months, GDRX ironically gets hit with a fresh Amazon Panic in pharmaceuticals.
On November 17th, Amazon.com announced Amazon Pharmacy. The services includes two key features:
- On-line fulfillment of prescriptions
- Free 2-day delivery and as much as 80% discounts on drugs not covered by insurance – services available only to Amazon Prime members.
The stock market crushed Walgreens Boots Pharmacy (WBA) with a 9.6% 1-day loss. GDRX plunged 22.5%. Like previous Amazon Panics, both stocks eventually recovered their losses. However, each took different paths to recovery. GDRX is sustaining its recovery so far.
The hit to WBA did not surprise me. The depth of GDRX’s loss initially surprised me as I concluded that GDRX could still be a valuable tool for finding the absolute lowest prices for drugs. The main issue was likely the high valuation that left no buffer for risks. Even now, GDRX has a sky-high valuation: 874 trailing P/E, 128 forward P/E, 34 price/sales, 23 price/book. This valuation is pricing for perfection. The premium pricing started right from the IPO. GDRX set its IPO price at $33, well above the expected range of $24-28….and STILL the stock opened up significantly higher at $46.
The Interviews
On the first day of the Amazon Panic, CNBC’s Jim Cramer discussed the news on-air. While GDRX was down huge, Cramer could not directly determine whether the selling made sense. Instead, he said he wanted first to talk to CEO Doug Hirsch – a sign that key information was missing to make a proper assessment. The segment went on to discuss the competitive battles between Amazon Pharmacy and Walmart’s (WMT) pharmacy and the impacts on the general industry.
The interview between Cramer and Hirsch came just two days later. GDRX gained 12.6% that day and barely looked back from there.
Hirsch emphatically announced that this news “…is not material to us at all.” He made several important points and claims:
- Amazon’s discount card is buried in its website. Competitors do not want consumers using it with them, and the offers are not as attractive as GoodRx.
- GoodRx Gold has lower prices than AmazonRx 90% of the time and many more price points. Amazon prices “the old way” before GoodRx.
- Mail-order drugs are only 5% of the prescription market and did not even grow in the pandemic. Amazon.com is trying to improve its capabilities in a small sliver of the market. The company is not trying to improve retail pharmacy.
- Pharmacies cannot discount prices. Such a practice would violate government and insurance contracts. (This explains why Amazon.com’s discounts only apply to drugs not covered by insurance payments).
The kicker of the interview came with Cramer thanking GoodRx: “While I love Amazon Prime, I would be foolish to move away from the prices you’ve gotten me.” That quote said everything to me. The stock’s full recovery makes sense in the context of this interview.
The Trade
Now that GDRX has filled the Amazon Panic gap down, I expect the stock to churn at these levels for a few weeks or so. Current levels are right around where GDRX first opened for trading and that level held as support before the Amazon Panic (see the above stock chart). For comparison, note that WBA filled the gap down from the June, 2018 Amazon Panic in less than 3 weeks (but of course now trades a lot lower today).
Still, my dim view of the retail pharmacy space remains. Instead of shorting WBA, I can now buy GDRX to make the related bet. My current bet is a covered call position. I had a “half position” in place when disaster struck with the Amazon Panic, and I bought into the sell-off because the stock was “close enough” to its IPO price – a relative bargain all things considered.
I am on my second covered call against my GDRX shares. The current call has a strike price of $50 and expires in January. I will be content getting called away at or above $50/share. If GDRX comes short of $50 at expiration, I will likely keep holding the position and sell yet another call option against it. If I had no position, I would buy the dips going forward down to about $42 where GDRX broke out to a post Amazon Panic high.
Be careful out there!
Full disclosure: long GDRX shares, short GDRX call option, long WMT calls