Amazon’s Next Big Thing

Seeking Alpha, June 27, 2019

Generally speaking, investors view Amazon (AMZN) as a company that falls into two categories: a website and logistics company that aims to serve as the world’s store, and a global provider of its AWS (Amazon Web Services) that acts as the firm’s cash cow. While this would be an accurate description of the internet giant, continued changes in its logistics operations are creating a transformation that will require investors to think about the firm (and its opportunities) differently. Beyond just owning distribution centers from which to transport its orders, the company is expanding into all areas of the delivery chain where value exists to the point where it might best be described, moving forward, as a comprehensive and diversified transportation firm leveraging its large website to sell directly and indirectly to consumers.


Amazon makes continued strides toward independence

Since its earliest moments, Amazon has found itself to be dependent on national and local shipping companies. As the firm grew, it did open its own distribution centers, but by and large it still relied on firms like FedEx (FDX) and United Parcel Service (UPS) to get its products from there to the end user. As the firm began investing in its own trucks, there was always that hint that the day might come when the company might move from being a client of the national transportation firms to being a rival to them.

Over the past few months, this possibility has morphed from simply that to a certainty. Amazon today is making significant strides toward shedding itself from the big firms in the industry, and as time goes on, investors should expect the firm to shift more in that direction. As an example of this, we need only look at the company’s latest deal with the GECAS operations of General Electric (GE). In a press release issued during the Paris Air Show, General Electric announced that it had decided to lease to Amazon 15 additional Boeing (BA) 737-800 aircrafts. These units are on top of the five units announced between the two firms earlier this year. Each one will be set up as converted units (from commercial flight to package transportation) that will enter Amazon’s network by 2021, at which time the company expects to have at least 70 aircraft in its portfolio. This is a significant ramping up for Amazon Prime Air, which launched back in 2016.

Adding aircraft isn’t the only means by which the company is growing its transportation operations though. In January of this year, the company announced the launch of its Amazon Scout in Washington. Scout is aimed at being an autonomous vehicle that drives along sidewalks at a walking pace, delivering small packages to consumers’ homes. On June 5th, the company further bolstered its portfolio by saying that Amazon Prime Air’s newest drone (technology that has been in the works for a few years now) will increase the company’s ability to offer same-day delivery in some areas. The drones can fly up to 15 miles and deliver packages less than five pounds in a span of under 30 minutes. Using AI, computer vision, and stereo vision, the units can land, drop off packages in a safe area, and then leave. The benefit to these units, management said, is that they will aid significantly in reducing the company’s carbon footprint. The goal of the internet giant is to see that 50% of its shipments are, from an emissions perspective, net zero by 2030. This will be accomplished by making it to where customers save on fuel by not going to the store for same-day needs and, instead, rely on Amazon.

All of these are significant moves by the company, but perhaps the biggest one yet occurred with its launch of the Delivery Service Partner program in June of last year. The company, in a bid to offer fast “last-mile” delivery options, stated that it is willing to help qualified individuals, with as little as $10,000, start up delivery opportunities where they can own between 20 and 40 vans that cater to the company’s logistics needs. Earlier this year, the firm revealed that it is willing to pay its own employees up to $10,000 to quit their current jobs and start up this line of business, with the opportunity estimated to bring in profits of between $75,000 and $300,000 per year. This, in particular, strikes home at FedEx and UPS.


This is a significant opportunity for the company

If the management team at Amazon executes on its transportation initiatives appropriately, the upside, in the form of reduced cost, plus in the form of additional revenue opportunities, could be really large for the business and its shareholders. As an example of this, we need only look at its peers. FedEx in 2018 generated revenue of $65.45 billion, up from just $50.37 billion two years earlier. Net income from the firm last year totaled $4.57 billion, while operating cash flow was $4.67 billion. For its current fiscal year, revenue came in at $69.7 billion, up 6.4% vs. last year, while net income came in at only $540 million but, on an adjusted basis, was still $4.13 billion.

FedEx it seems has seen the writing on the wall regarding Amazon. In an announcement made June 7th of this year, the company stated that while its other contracts with Amazon will remain as-is, it has made a strategic decision not to renew its current FedEx Express US contract with the internet giant. Less than 1.3% of the company’s total revenue comes from Amazon, so it’s not a huge loss, but the company clearly saw no reason to continue building up another competitor.

UPS, meanwhile, has also illustrated that this is an attractive opportunity for Amazon. Last year, the firm’s sales came out to $71.86 billion, up from $61.61 billion two years earlier. Net income totaled $4.79 billion, while operating cash flow was $12.71 billion. This year, revenue at the firm is only marginally higher than it was the same time last year, but for UPS, that consists of only one quarter so far.

According to FedEx, one thing really going for the industry is that, in the US alone, there are around 50 million packages transported every day as a result of e-commerce. By 2026, this is expected to at least double to 100 million packages per day. For Amazon, this is only the start. Of its non-AWS revenue last year, $141.37 billion came from North America, while a further $65.87 billion came from international markets. In the past three years, North America saw its annual revenue grow at a rate exceeding 30% per annum on average, while international markets have grown at a pace exceeding 20% per annum. As the company continues expanding its online sales, taking control of its own transportation operations will open the door for it to grow its $7.27 billion in operating profit seen in North America last year, and it might give the firm the ability to move the $2.14 billion in losses from international markets toward gains (or at least smaller losses).


Takeaway

Right now, Amazon is undergoing a fantastic transformation. The company earlier this year announced plans to invest around $800 million to move from free two-day shipping for Prime customers to free one-day shipping, but that’s only a small piece of its commitment to becoming a comprehensive transportation firm. By investing in large aircraft, small drones, autonomous delivery vehicles, and even entrepreneurs who want to ride the Amazon wave, the firm is expanding its network, decreasing costs, and increasing the opportunity to leverage its distribution chain for other purposes down the road. Absent some major misstep by the management, I have a hard time seeing how this turns out bad for the firm and, more likely than not, it will prove to be a net positive for the company’s shareholders.