Amazon's grocery business is $70-90B opportunity, analyst predicts

RBC Capital Markets Analyst Mark Mahaney joins Yahoo Finance’s Seana Smith to discuss why Amazon's grocery business is a $70-90B opportunity for the e-commerce giant.

Video transcript

SEANA SMITH: Coronavirus outbreak is altering consumer behavior. Many more Americans are ordering items online than they were just a few weeks ago. RBC is out with a new note this week, and they were saying that the COVID crisis is creating a quote, "inflection point" for grocery shopping. Mark Mahaney of RBC Capital Markets joins us now with more on this.

And, Mark, thanks for taking the time. The note you sent out this week was pretty interesting. You reiterated that outperform rating on Amazon based on this thesis just in terms of more people spending online, especially when it comes to their groceries. How many more people are buying their groceries online at this point, do you think?

MARK MAHANEY: I think the way to think about it is this-- the crisis, unfortunately, accelerates what's been a multi-year trend. So we've run the survey for five years in a row. We've asked people what percentage-- or how many of them purchased groceries online? When we started this about five years ago, that percentage was something like 5%, and it was a small percentage of their overall sales that would actually occur online. Last year when we ran this, it was almost 30%. And now we've run it, and it's 50%.

We saw this big gap up. My guess is that this crisis accelerated the online adoption of grocery shopping by two or three years. We just hosted a call with Instacart earlier today, and I think what's happened is consumers have become more aware of the option to buy online, and they've become more comfortable with the process. So that's what's created something of an inflection point.

SEANA SMITH: When it comes to-- I was reading your note, you were saying Amazon already accounts for roughly 20% of US online retail sales. Well, if that number continues to grow driven by the boost that you're talking about in their grocery division, how high do you think that number can climb?

MARK MAHANEY: Well, it depends on what happens with the other beneficiaries of this trend. And by the way, I do think there's several-- it's not just Amazon-- private companies like Instacart. I think Walmart, especially with click and collect, may be a big winner from this. I mean, we're seeing a fundamental change in how consumers shop-- unfortunately because of this crisis.

Now, whether that leads to a permanent change post the crisis, it's an open question. But our guess is that it is. I'm sure some people will go back to only purchasing in-store, but I think when people get used to, habituated to purchasing online and they experience the convenience of it, I think you'll see this step up-- this accelerated step up in people purchasing online. I think Amazon at least maintains its share.

It will depend-- it will come down to how well they're able to fulfill demand in this next month or two. And people are going to remember if they've had a bad experience at Amazon, they couldn't get the time slots they wanted, maybe not initially-- there's just a surge in orders. Amazon talked about a 50x-- 5-0-- 50x increase in the number of people-- number of grocery orders on its network. No wonder they can't fulfill all that demand. But if the next month or two they can get close to fulfilling that, people will remember that and they'll stick with Amazon. And it will come down to who executes best in the surge environment.

SEANA SMITH: One company that certainly is not seeing any sort of boost from the coronavirus is Uber. And I know you cover that company very closely. And just in terms of the ridership numbers and we have been seeing or the comments that we got from CEO Dara Khosrowshahi earlier last month, the picture that he was painting was pretty grim just in terms of what we could expect in the short term. From your perspective, do you think Uber will be able to weather this crisis? And I guess, how big of an impact do you think coronavirus is going to have on their business, ultimately?

MARK MAHANEY: So, Seana, I think the answer to your first question is it's a liquidity question. I mean, do they have enough cash to get through this environment? They've done some stress-testing of their models. We've done our own stress-testing of their models. You know, look, the advantage they have is they went in-- thanks to this IPO, they went into this year with $10 billion in unrestricted cash. They've got some acquisitions. We think in a worst case scenario, they probably end up somewhere between $3 and $5 billion in cash at the end of this year. So yeah, they can weather this crisis. Assuming it doesn't go on for two years, they can weather the crisis.

And then the question is, what's this business going to look like afterwards? Our guess is that there's a little bit of a v. There'll be a v in the company's recovery. I think as soon as we can leave our homes and commute again, we're going to be using Uber and Lyft. I think as soon as we can leave our houses and go to social events, go to restaurants, go to soccer practices, those sorts of things, we're going to be using Uber and Lyft again. So I think that part of the business can really v back up. I just don't know when that is. You tell me when we're leaving homes, and I'll tell you when the v begins.

Then the other part of the business, though, for Uber is their Eats business. I'm not sure that's inflected up as much as groceries, but I am certain that there's some very strong demand that's being generated, because people still want to order food, order delivery-- not just groceries, but order food delivered to their homes. And I think some of these companies-- call it DoorDash or an Uber, I think they're seeing a surge in demand for that business. Although it's-- I think you're also taking away some of their business from people who ordered from the workplace. But anyway, I think that part of the business is probably not seeing changed in its growth and maybe a modest improvement.

SEANA SMITH: Yeah, it's interesting there. Uber Eats could be getting a little bit of an uptick here because of the outbreak that we're seeing. But, Mark, I mean, the big question for Uber and a lot of the skeptics out there are saying that they won't turn a profit anytime soon. From your modeling from what you've taken into account, where do you see them potentially-- or do you see them potentially turning a profit anytime soon?

MARK MAHANEY: They laid out a goal of achieving break-even or slightly positive EBITDA in the fourth quarter of this year. It's a very variable cost structure. So if they are able to get back to reasonably close to full demand by the fourth quarter, I think they can still hit that. It really depends on the length of the quarantine in this country. So if we can get out of our homes in May or June, I think they can reach this EBITDA profitability break-even in the fourth quarter. I know that's not the same as free cash flow, but you have to first get EBITDA break-even, and then free cash flow profitability is probably a year or two lag after that.

SEANA SMITH: Yeah, certainly there's lots of question marks just in terms of the timing of all-- whether or not we are going to see it anytime soon.