When it comes to Amazon.com, Inc. (NASDAQ:AMZN), there is always plenty of debate. Can the company keep growing? What about profits? Is the company involved in too many categories? And what about the nosebleed valuation on Amazon stock?
All of these are certainly legitimate issues. But there is one that has been a nagging concern for AMZN stock since its early days — that is, shipping costs.
In the most recent quarter, they spiked by 43% to $3.9 billion, while revenues rose by 29% to $32.7 billion. It was actually the second highest amount ever. In fact, it was enough to help knock off Amazon stock by about 5%.
True, AMZN does generate its own shipping revenues, such as from extra charges to customers and fees from Prime. Yet the net amount of $1.75 billion still represents about 5.1% of revenues. So cutting this back a few percentage points would certainly make a big impact on the bottom line and likely provide a nice boost to Amazon stock.
Given all this, is it any wonder that a critical strategic initiative for the company is to build a massive logistics platform? Of course not. It’s really a no-brainer. In fact, AMZN CFO Brian Olsavsky recently said that logistics is about the company controlling its “own destiny.”
But the investments will be significant. Already Amazon has put together a fleet of thousands of trucks. There are also 40 new cargo jets and even an ocean cargo vessel.
AMZN Stock to See Some Uber Magic?
Actually, all these kinds of efforts are in the early stages. But for Amazon, the company is not about taking small moves. It’s about making a massive impact. In other words, it appears that the company really wants to hollow out a big part of the business it does with FedEx Corporation (NYSE:FDX) and United Parcel Service, Inc. (NYSE:UPS).
But there is another part of the strategy that could be essential in making AMZN a successful logistics powerhouse: an Uber-style app for trucking. So far, the details are sketchy. But it looks like Amazon plans to launch a system — during the middle of 2017 — that will allow companies to easily locate and sign-up a freight operator.
This is something that is not necessarily new, of course. But AMZN stock has some big-time advantages. The company can leverage its massive e-commerce business, which involves a myriad of warehouses and fulfillment facilities. What’s more, Amazon has tremendous engineering talent and assets.
Interestingly enough, the company could leverage its artificial intelligence and machine learning to provide for efficient routing and compliance (keep in mind the regulations in the trucking industry are onerous).
Oh, and an Amazon app would cut out the middleman in the freight market, where the fees are generally 15%. Even better, the company could charge its own fees for third-party transactions — and this could provide a massive market opportunity. Consider that the trucking industry generates revenues of $800 billion a year.
Bottom Line on AMZN Stock
The bottom line: Amazon would be in a position to defray a substantial amount of its main shipping costs. The strategy would be to turn a cost item into a revenue segment. Kind of ingenious, right? Definitely. Perhaps this is why it seems that AMZN is not wasting any time establishing this business.
It’s also encouraging that Amazon has a pretty good track record of entering new markets. Just look at cloud services.
In roughly 10 years, AMZN turned this into a business with a whopping $13 billion in annual revenues. It did this when other traditional tech companies, like International Business Machines Corp. (NYSE:IBM), SAP SE (ADR) (NYSE:SAP) and Oracle Corporation (NYSE:ORCL), dragged their feet and did not understand the importance of the technology.
Let’s face it, Amazon stock would be worth a lot less if the company did not make this gutsy bet.
As noted various times for InvestorPlace.com, I’ve been bullish on the company. AMZN stock is likely to benefit from multiple megatrends, such as e-commerce, cloud computing and even AI. Granted, the valuation on Amazon stock is hefty, with the forward price-to-earnings ratio at 85X. But this is to be expected for a company that continues to grow at a rapid pace.
Besides, with the aggressive innovations — such as the trucking app — there is quite a bit of potential for margin expansion as well.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
