Woot Acquisition Won’t Move Amazon’s Stock

July 8th, 2010 by Trefis Team
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Amazon (NASDAQ:AMZN) is the largest online retailer in the U.S. It competes with companies like eBay (NASDAQ:EBAY), Wal-Mart (NYSE:WMT) and Best Buy (NYSE:BBY). Amazon recently acquired e-commerce startup Woot.com for a rumored $110 million in cash.

Woot offers a single featured item for sale each day at a discounted price. It has about 2.75 million registered users on its platfom. Woot should help Amazon attract impulse shoppers. Because much of Woot’s business comes via referral from Facebook, the acquisition should also help Amazon understand the social behavior of its customers, allowing it to craft more focused marketing campaigns. Finally, Amazon can use Woot’s relationships with manufacturers to buy inventory at lower prices.

Given Woot’s small scale relative to Amazon, however, we do not expect the acquisition to impact Amazon’s stock price during the Trefis forecast period. Our analysis follows below.

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Why buying Woot makes sense for Amazon

1.  Impulse buyers

Shoppers generally visit Amazon platform to buy specific items. By contrast, Woot attracts impulse buyers who may not actually need the product but are attracted by the discount. Amazon almost certainly plans to use Woot to get these impulsive buyers on to its platform. Once on Amazon, they are likely to purchase more items.

2.  Rich consumer data

Around 10% of Woot’s traffic  comes through referrals from Facebook. By studying the social behavior and shopping habits of Woot shoppers, Amazon will be able to offer them customized deals.

3.  Strong manufacturing relationships

Woot buys bulk excess inventory from manufacturers at discounted prices. Amazon can use Woot’s relationships with manufacturers to reduce its cost of goods.

We expect Amazon to gain market share…

We estimate that online retail sales account for 85% of Amazon’s stock value. Amazon’s two main merchandise categories are Electronics & General Merchandise (EGM) and  Books, DVDs & Music (Media).  EGM contributes 48% of the$119 Trefis price estimate for Amazon’s stock, Books, DVDs and Music contributes 37% of the stock’s value.

We expect Amazon’s share of U.S. online EGM sales to increase from around 6% in 2009 to around 9% by the end of Trefis forecast period.

We estimate that Amazon’s share of US online books, DVDs and music sales is around 31% currently, and expect this to reach close to 34% by the end of Trefis forecast period.

But not because of Woot

Woot sells selected electronics products along with general merchandise items such as wine and apparel. However, Amazon sells these products at a much larger scale. Techcrunch reports that Amazon paid $110 million in cash for Woot. Although the acquisition makes a great deal of strategic sense for Amazon, we do not expect it to impact the $119 Trefis price estimate for Amazon’s stock. Why not? In a word, scale. Compared to the $53 billion Trefis market cap estimate for Amazon, Woot’s $110 million valuation is a drop in the ocean.

Do you agree? You can modify our forecasts above to see how Amazon’s stock price would be impacted if its U.S. online retail market share grows more than we forecast as a result of the Woot acquisition.

And you can see the complete $119 Trefis Price estimate for Amazon’s stock here.