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How Worried Should FedEx Corporation Be About Amazon.com, Inc.?

Will Ashworth

If you own FDX stock, you’re probably hoping FedEx Corporation (NYSE:FDX) CEO and founder Fred Smith and the rest of his management team isn’t too worried.

However, it would be corporate malpractice in my opinion, if FedEx wasn’t considering the ramifications of Amazon.com, Inc.’s (NASDAQ:AMZN) quest to own the home.

I recently discussed how Amazon’s grand plan is to sell as many products and services as it can to its 90 million Prime customers. 

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In order to successfully achieve its grand plan, it must put into place a logistics operation that is up to the task of getting the products to customers quickly and efficiently.

Whether it’s creating its own shipping business to pick up product from suppliers to get it out to the customer faster or to conquer the final mile, Amazon is now a direct threat to FedEx and FDX stock despite also being a big customer. 

That’s a tough place to be if you’re FedEx.

The Natural Reaction

Any company faced with the possibility of losing a big customer is going to do what it can to keep the customer happy whether that’s through lower prices or additional services.

It’s only natural, but it’s the wrong reaction.

Rather than beg Amazon to keep using it — Amazon CEO Jeff Bezos knows he has the upper hand — Smith ought to keep the company playing to its strength, which is delivering letters and packages next day and the day after that.

FedEx Express, which accounts for approximately 57% of the company’s overall revenue, is working to make this segment more profitable through ongoing cost management initiatives. Over the next three years, it plans to add as much as $1.5 billion in operating income as a result of those initiatives.

The next biggest revenue generator is FedEx Ground, which accounts for 30% of its annual revenue; it’s grown market share for 18 consecutive years.

Together, these two segments of its business, along with FedEx Trade Networks (FTN), are ready to meet the logistics and e-commerce solutions for customers everywhere.

FTN is a collection of specialty services at FedEx that is being brought under one roof to provide a more seamless customer service experience. It will be a part of FedEx Express for reporting purposes.

The important thing for owners of FDX stock to remember is FedEx is not a tiny company. And Amazon is not trying to put it out of business.

Remember Bigger Picture

The latest news has DHL launching a delivery service called Parcel Metro for online retailers in eight U.S. cities including New York, Chicago and Los Angeles, offering two-hour, same-day and next-day delivery.

“Amazon is growing 35+ percent per year, and they need to figure out a way to get stuff to the buyers. FedEx and UPS have told Amazon they won’t scale with them, meaning that Amazon has to figure out a way to support their delivery network themselves,” Cowen & Co. analyst Helene Becker told CNBC. “It also helps that DHL’s U.S. hub is in Cincinnati and that is where Amazon is building their air hub. We don’t think that’s a coincidence.”

Amazon is doing what it has to do — getting involved with DHL — to grow its business. It’s not personal, just business. The same goes for FedEx.

We could just as easily be reading about some Amazon/FedEx initiative, but we’re not because Smith et al made the wise decision not to play favorites.

Remember, DHL has failed in the U.S. before. Amazon’s simply covering all of its bases.

Bottom Line on FDX Stock

I recently called FedEx one of the seven transportation stocks that drive the American economy.

As long the U.S. economy remains healthy, despite the perceived threat from Amazon, I believe FDX remains one of the best S&P 500 stocks you can own for the long haul.

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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