Amazon AMZN is doing something avant-garde, paying employees to quit and start their own business. Amazon is offering employees 3-months pay and $10,000 worth of startup funds to open their own local delivery services. This an effort by Amazon to alleviate some “last-mile” expenses and expand its competitive platform into the transportation and logistics services industry. Amazon’s move to 1-day delivery is only going to increase its need for “last mile” delivery services to be reliable and efficient.
Shifting Consumer Spending
E-commerce has changed the way that American’s shop. American’s are leaving their houses less and less these days, with modern shopping done with just the click of one’s mouse/trackpad. It is cutting jobs in the traditional retail market but creating them in logistics. With unemployment at a 50 year low, it is becoming increasingly difficult to attain sufficient logistical support to ensure that the increasing volume of packages gets delivered on time.
Just in my apartment building, I see my doorman struggling every day to organize and manage the rising number of packages that are being delivered daily. I walk into the building sometimes and see my doorman scrambling through, what looks like, 100s of boxes, a lot of which have the Amazon logo on them.
Amazon has changed the e-commerce industry forever, from selling books out of Jeff Bezo’s garage to delivering millions of packages a day across the world. The business is working on growing its internal logistics and delivery operations. Fulfillment centers are popping up all over the US, with Amazon currently operating more than 75 across the country. These fulfillment centers are strategically placed to get orders to clients in as little as a few hours.
Amazon just added “transportation and logistics services” to its long list of industries that it views as competition on its most recent annual report. They are currently partnered with the largest competitors in this space, FedEx FDX, UPS UPS, and USPS.
This has sparked some concern for these delivery firms who have been able to reap the benefit of the growing e-commerce space. When the seemingly omnipotent Amazon adds you to its list of competitors shareholders will perceive this as a bad omen for future cash-flows and the corresponding stocks will suffer. FDX is down over 30% over the last 52-weeks while UPS is showing investors 13.7% losses in the same time frame.
United Parcel Service, Inc. Price and Consensus
United Parcel Service, Inc. price-consensus-chart | United Parcel Service, Inc. Quote
FedEx Corporation Price and Consensus
FedEx Corporation price-consensus-chart | FedEx Corporation Quote
Amazon’s New Approach
Amazon’s offer of $10,000 and 3-months pay for its employees to quit and start their own franchised Amazon deliver business is a small step towards the impending competition with the larger delivery couriers that I discussed earlier. This offer began last June and has already seen more than 200 of these businesses started. Now the offer is being extended to anyone with $30,000 in capital, to become an Amazon Delivery Service Partner.
The “last-mile” transportation issue that Amazon is experiencing, transporting goods from the fulfillment centers to the actual consumer, is done both through internal delivery and through “competitors” like FedEx and UPS. But not for much longer. These small local delivery franchises are expected to take up 50% of this volume by 2022.
Amazon is yet competing in another industry and they seem to have the upper hand already. With the mere volume of their current fulfillment operation, it would only make sense to take care of delivery in-house to reduce unneeded third-party costs. Once they’ve reached a sufficient scale to take care of their transportation needs completely, they are likely to expand this operational segment to deliveries outside of the Amazon’s scope. Taking business from their longtime partners UPS, FedEx, and USPS. Analysts have lowered earnings estimates for both UPS and FDX over the past 90 days and have pushed both of these firms into a Zacks Rank #4 (Sell).
Amazon, on the other hand, is expanding operations to different segments and continuing to grow and excel in the categories they lead. They appear incapable of a misstep. This is one company that I have been waiting to buy on a dip and should have at the end of 2018. AMZN is trading at a PEG of 1.8x compared to the rest of e-com trading above 2x, which you can see in the 52-week chart below.
This means that the P/E valuation with expected growth taken into account for AMZN is below the industry average. As you can see AMZN PEG valuation has fallen significantly over the past 52-weeks with more and more growth expected. It looks lining up to be a buy. I would wait for the stock to fall to the $1750 range before I would consider buying, but this stock may go nowhere but up.
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