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Wednesday, February 8, 2023

Amazon’s Billion-Dollar Deal: Here’s What You Need to Know

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Amazon (AMZN -1.77%) already is a giant in e-commerce and cloud computing. Those businesses have generated billions of dollars in revenue and profit. But Amazon hasn’t stopped there. The company started showing an interest in healthcare in recent years. That’s with the launches of its own pharmacy and telemedicine service Amazon Care.

Now, Amazon has turned that testing of the healthcare waters into a full-fledge dive into the pool. The company signed an agreement to buy U.S. primary care organization One Medical for $3.9 billion. Here’s what you need to know about the deal — and what it might mean for Amazon’s shares.

An attractive package

First, a bit about One Medical. The company — under the administrative umbrella of 1Life Healthcare — offers a pretty attractive package of healthcare services. Virtual visits are available all day, every day. But, unlike telehealth-only companies, One Medical offers in-person visits too at a network of medical offices around the country.

And the company’s app lets you schedule appointments, chat with your healthcare provider, and request prescriptions. The company even promises appointments that start on time. Another stand-out feature: You can gift a one-year membership to someone for $199.

The company isn’t yet profitable. But that’s also the case for rivals Teladoc Health and Amwell. This isn’t surprising for companies in this rather new field.

But One Medical’s healthcare recipe has resulted in impressive revenue and membership growth. Revenue has steadily climbed since the 2020 initial public offering. Last year, membership rose 34% to 736,000. And in the first quarter of this year, membership increased 28% and revenue soared 109% to more than $254 million. More than 8,000 companies offer One Medical to their employees.

Of course, these numbers may look small when you compare them to other parts of Amazon’s business. For instance, Amazon Web Services brought in $18.4 billion in sales in the first quarter. And One Medical’s revenue and membership numbers might even look insignificant compared to those of telehealth giant Teladoc. Teladoc boasts more than 54 million members in the U.S. The company also operates internationally. And first-quarter revenue topped $565 million.

A growing market

But One Medical still can prove to be a valuable asset for Amazon. Here’s why. The telehealth market is growing. At a compound annual growth rate of more than 15%, the U.S. telehealth market is forecast to reach $25.8 billion by 2027, according to Polaris Market Research.

One Medical’s mix of telehealth and in-office care can capture this newer high-growth market — and the traditional market. Amazon is paying $18 per share in an all-cash transaction to get access to this opportunity. Considering the potential of the virtual and traditional markets and Amazon’s resources, this investment could pay off.

The transaction still must be approved by regulators and One Medical shareholders — so it won’t be done overnight. But this is a move in the right direction for Amazon if it aims to seriously enter the world of healthcare. And it eventually could add another business that may be less sensitive to issues plaguing Amazon’s e-commerce operation today. Here, I’m talking about rising inflation and supply chain problems. These issues hurt operating cash flow and operating income during the past two quarters.

A cushion during downturns

Higher inflation and other economic troubles usually make less of a mark on healthcare companies. When the economy is suffering, people can cut spending in many areas. But they often don’t have a choice when it comes to medical appointments and prescription medications. So, a strong healthcare business could cushion Amazon during economic downturns. And that could support stock price gains.

It’s too early to predict exactly how big Amazon’s presence may become in the world of healthcare — or whether it will succeed. Teladoc and others such as Amwell could make it difficult for Amazon to gain market share. Still, there’s reason to be optimistic about the plan to acquire One Medical — and what this could mean for Amazon shares over time.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Teladoc Health. The Motley Fool has a disclosure policy.

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