On New Year’s Day, Gene Munster, former Piper Jaffray analyst and currently a venture capitalist at Loup Ventures, predicted that Amazon will buy Target. This prediction got picked coverage in hundreds of publications yesterday. Let’s look at why analyst types make predictions like this, how accurate those predictions are, and what they do for the analyst.
Here’s what Gene Munster actually wrote
Here’s an excerpt of Munster’s 2018 predictions post, in which the Target acquisition is the last of eight items:
Amazon will acquire Target. We saved our boldest 2018 prediction for last, Amazon acquiring Target. Getting the timing on this is difficult, but seeing the value of the combination is easy. Amazon believe’s the future of retail is a mix of mostly online and some offline. Target is the ideal offline partner for Amazon for two reasons, shared demographic and manageable but comprehensive store count. As for the demographic, Target’s focus on moms is central to Amazon’s approach to win wallet share. Amazon has, over the years, aggressively pursued moms through promotions around Prime along with loading Prime Video with kid-friendly content. As for retail stores, Amazon’s acquisition of Whole Foods 470 stores along with testing of the Amazon Go retail concept is evidence that Amazon sees the future of retail as a combination of mostly online and some offline. Despite gaining Whole Foods, Amazon’s ~470 store presence still dwarf’s Walmart at 11,695 (global). If Amazon acquires Target’s that would jump its store count to about 2,300. As for anti-trust, the Trump administration won’t do any favors for Jeff Bezos, but the market share numbers suggest the deal will be approved. Walmart will reach about $315B in U.S. sales in 2017 (total 2017 Walmart is expected to be $500B, up 2.6% y/y), and Amazon North American ($105B in 2017 up 31% y/y) and Target ($71B, up 2.4% YoY) would equal about $176B in U.S. revenue. Looking at the top 18 U.S. retailers (including grocery), Walmart has about 23% share and an Amazon/Target combination would have about 13% share. Lastly, Amazon can afford Target. If you assume they pay a 15% premium to the current TGT trading level would imply a take-out valuation of $41 billion, about 8% of the value of Amazon’s current $564 billion market cap.
Let’s take this apart. What elements underlie this prediction?
- It fits a pattern. Few suspected that Amazon would buy Whole Foods before it happened. But with that acquisition in the rear-view mirror, Amazon-Target appears more plausible.
- The financials work. Financial analysts always make sure the numbers make sense. Amazon can afford to spend 8% of its value for this acquisition. Based on Munster’s analysis, it would probably pass antitrust scrutiny. Target’s sales are declining, like just about every retailer’s, but its 4% net profit margin is more than twice Amazon’s.
- It fits the companies’ strategies. Munster believes Amazon will be moving swiftly into bricks-and-mortar retail. Target is fighting an uphill battle against its larger rival Walmart. It’s plausible that Amazon would want more stores, and that Target would want a larger partner with a dominant online presence. Munster’s argument about the “mom” market is weaker; Amazon sells to everyone, and so does Target, and there are dozens of other store chains that are at least as mom-focused as Target. (Do you think there are any moms who don’t already shop at Amazon?
So this qualifies as analysis, since it’s based on a financial expert’s view of companies that he follows, their behavior, and their financials.
Why did Munster make this prediction, and is he likely to be right?
Thought leaders’ ideas can spread if they are big, new, and right.
Is it big? Amazon and Target are two of the top ten retailers in the U.S., and they are household names.
Is it new? No one I could find had predicted this move before, although there was plenty of speculation on which traditional retailer Amazon would buy next.
A prediction of this kind by an established analyst will certainly get a high degree of visibility. And these predictions can come true. In my first few months at Forrester Research, I participated in a research meeting where the analysts discussed the rumor that Lotus Development Corporation was on the block, and who might buy it. The legendary John McCarthy soon after published his prediction that IBM would buy Lotus, and he was right.
But historically, a small number of predictions of this kind turn out to be true. What Munster has done is to provide a plausible case for the acquisition — so plausible that Target shares jumped 4% on the “news.” But Munster himself hedged the prediction with the statement, “Getting the timing on this is difficult.” Guess what: getting the timing on any acquisition is difficult.
Here’s what you need to know: a prediction of this kind is all upside from the perspective of the thought leader making it.
If Amazon buys Target any time in the next two years, Munster will get credit for accuracy, and gain influence.
If Amazon does not buy Target in the next two years, this prediction will be forgotten and no one will care.
Either way, Munster gets attention and boosts his visibility. Unless he develops a track record of poor predictions, people will still see him as having an analytical vision that’s worth paying attention to.
What this means for making (and reading) predictions
Your favorite analysts and thought leaders have produced their predictions for 2018, and you’ve probably seen them. What can we learn from a prediction like this?
- If you are or aspire to be a thought leader, then show off your chops with predictions. There’s no better way to demonstrate your capabilities and thinking. You’ll not only get publicity; you’ll demonstrate your process. A good prediction should be counterintuitive, based on knowledge and techniques that only you have, and logically sound — much like Munster’s.
- If you are reading thought leaders’ predictions, focus on the process, rather than the results. Many predictions are vague. Some will not be actionable. And many will turn out to be wrong. But by examining how the analytical thinker reached their conclusion, you may learn something about markets and the future that you would never have realized otherwise. Predictions advance thinking, even when they turn out to be wrong.