There seems to be no end to the success of Amazon.com, Inc. (NASDAQ:AMZN). During Prime Day 2017, the company reported that sales soared by more than 60%.

On the news, AMZN stock got another lift, hitting over $1,000 a share.

Despite all this, I still think there are notable risks. Let’s face it, Amazon stock could easily get weighed down as the company suffers from overextension.

Jeff Bezos has loads of money, sure, but world domination ain’t cheap! And it requires tremendous managerial bandwidth.

Just some of the categories that Amazon is gunning for include devices, movie production, fashion apparel, delivery services and so on. There are even rumors that the company is poised to launch its own real estate referral service. Just the mere murmur of this was enough to knock about 4% off the value of Zillow Group, Inc. (NASDAQ:Z) stock.

I think the biggest risk for AMZN stock, however, is the brash $13.7 billion deal for Whole Foods Market, Inc. (NASDAQ:WFM). By far, it’s the company’s biggest acquisition — and also means lots of exposure to the brick-and-mortar world. The margins are also razor thin and Amazon will need to absorb a head count of 91,000 employees.

But the reaction from Wall Street has been predictable. The deal for WFM is about disruption and leveraging the magic of data. All in all, the conventional wisdom is that the deal will be further fuel for AMZN stock.

At the same time, Wall Street has dumped grocers as well as companies that have substantial exposure to the category, like Target Corporation (NYSE:TGT).

But the company that has been the brunt of some of the worst punishment is Kroger Co (NYSE:KR). It’s as if investors think this company is headed for a quick extinction. And that the best alternative is just to thrown in the towel and buy more AMZN stock.

AMZN Stock vs Kroger Stock

I think there is actually an interesting contrarian play here. You just need to avoid some of the noise and keep some important factors in mind. First of all, the grocery market is habitual. Consumers generally do the same things, such as with where they shop and what they shop for.

A recent survey of 2,900 grocery shoppers from Morgan Stanley highlights this. Note that about 70% of the respondents base their decisions primarily on a convenient location and 54% are concerned about the best prices. Interestingly, the survey shows that Kroger scored the highest for both of these.

Something else: About 70% of the respondents say they do not shop at WFM because they can find better prices elsewhere. The grocer also was ranked last for the convenience of its locations.

And finally, about a third of the respondents said they were not likely to shop online for groceries.

All in all, these findings should be concerning for holders of AMZN stock. It also does not help that WFM has been struggling during the past couple years. According to InvestorPlace’s James Brumley:

“Calling a spade a spade, Amazon is buying into a business that isn’t doing well. While sales are still growing for Whole Foods, the pace has slowed to a crawl, and per-share earnings have been declining since last year. Net income has been retreating since 2015.”

Why KR Looks Interesting Now

KR has been showing progress with its own digital efforts. For example, My Magazine delivered over 6 million personalized offers in the first quarter. And while Amazon recently made headlines again with news that it’s selectively testing meal kits, gutting Blue Apron Holdings Inc (NYSE:APRN) in the process, Kroger also has developed its own meal kit offering, “Prep-Pared.”

In the meantime, KR management continues to focus on shareholder value. Recently, management authorized a $1 billion share buyback and increased the annual dividend from 48 cent to 50 cents (the average annual growth rate has been 13% since 2006).

Now this does not imply that KR is without its problems. It’s true that the company has had two consecutive quarters that showed lagging performance. There are also issues with price deflation with food items.

Yet much of this has been baked into the stock — and then some. For the year so far, KR stock is off about 32% and the forward price-earnings ratio is at 11. In other words, if the AMZN threat is really overblown, KR certainly does look like an attractive value play right now.

— Tom Tauilli

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Source: Investor Place