Amazon.com, Inc. Delivery Pilot Makes AMZN Stock Soar

Amazon.com, Inc. (NASDAQ:AMZN) simply doesn’t stop. According to a Bloomberg report Thursday morning, the company is testing its own delivery system on the West Coast, with a broader U.S. rollout expected next year. AMZN stock is up almost 9% on the news, as it tries to claw its way back to $1,000 per share.

Amazon.com, Inc. Delivery Pilot Makes AMZN Stock Soar
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I wrote just two days ago about the stunning breadth and depth of Amazon’s business and the delivery prospect only adds to its reach. Amazon’s ability to become a third-party logistics provider further drives its goal of being the dominant retailer, if not the dominant business, worldwide.

Investors aren’t necessarily betting against Amazon.com, either. Shares of shipping leaders United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX) fell on the news, though FDX stock has recovered most of its early losses.

Like a number of recent moves, notably Amazon’s acquisition of Whole Foods, the delivery service on its own doesn’t radically change Amazon’s near-term earnings or fundamental valuation. But the strategy that is coming into view of late shows just how grand Amazon’s ambitions are. If the company can achieve these ambitions — and I believe it can — then AMZN stock will continue to gain.

Amazon’s Strategy Comes Into View

Between the Whole Foods acquisition, the delivery pilot and other moves, Amazon’s strategy is becoming clear. It wants to be the preeminent retailer across channels, not just online. And it wants to vertically integrate itself in the industry as well.

Amazon.com isn’t just a website to sell other companies’ wares. It is developing its own private label business. Whole Foods’ retail footrprint can be used for Amazon Lockers and sales of the Echo. The partnership with Kohl’s Corporation (NYSE:KSS) expands that in-person reach as well, allowing for in-person returns. And the continuing expansion of fulfillment services for third-party sellers — which already included shipping via FedEx, UPS and the USPS — makes Amazon a logistics play, not just a selling platform.

Amazon is becoming, to use the phrase coined by author Matt Taibbi about Goldman Sachs Group Inc (NYSE:GS), the “great vampire squid” of retail. And it’s the optimism behind these ever-broadening efforts that drives the valuation of Amazon stock.

AMZN stock isn’t overvalued, as I’ve long argued. Indeed, the short-sighted arguments about the stock’s high P/E ratio miss the point entirely. This is a company that plans to dominate retail — and is likely going to succeed. Certainly, investors believe that’s the case. Witness the decline in UPS and FDX stock today. Look at the plunge in Kroger Co (NYSE:KR) and other grocery stocks since the Amazon/Whole Foods tie-up. Amazon generally has won wherever it’s gone.

And AMZN stock — which, again, is cheaper than it looks when one understands the company’s true earnings power — is a bet on that trend continuing.

The Key Risk to Amazon Stock

All that said, the biggest risk to Amazon is that very same strategy. No company in recent history — and, perhaps, ever — has had as many balls in the air as Amazon. And as I pointed out almost a year ago, Amazon has had more than its share of flops.

It’s a real question as to whether Amazon can develop a network that’s a true competitor, or even a real complement, to the systems developed by UPS and FedEx over the decades. Amazon’s efforts to control its last mile also potentially offsets what many analysts have called a subsidy to the company from the USPS.

This is a massive undertaking for Amazon. Augmenting its supply chain to the point that it can carry third-party packages to the customer’s door (or to the nearest Whole Foods or Kohl’s) is a process that will take years, if not decades. And, like anything in business, it’s not guaranteed to work. Wal-Mart Stores Inc (NYSE:WMT), a supply chain leader itself, will surely be a tough rival going forward.

Bottom Line on AMZN Stock

For now, investors are staying patient with Amazon stock. Shareholders focus not on margins, but on growth. Somewhat ironically, though, that bullishness itself is a risk. If the market decides Amazon needs to be profitable, its competitive edge could diminish.

I’m skeptical that happens any time soon, however. And, in the meantime, Amazon will continue to build out its dominance. It’s already built the preeminent supply chain in the world. I see no reason why further expansion will hit major roadblocks.

This company is too big, too powerful and too smart to be stopped. That’s a problem for everyone else. But it’s great news for Amazon stock.

As of this writing, Vince Martin has no positions in any securities mentioned.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/amazon-amzn-delivery-pilot-amzn-stock-soar/.

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