Amazon: Officially Launches Supply Chain Services, Leveraging Internal Services to Outside Clients

Key Morningstar Metrics for Amazon

• Fair Value Estimate
  : USD 280
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

Amazon AMZN announced it has launched Amazon Supply Chain Services, thereby broadening its services availability to the company’s freight, fulfilment and distribution, and parcel delivery.

Why it matters: We view this as an opportunity for Amazon to generate a higher return from its infrastructure and note the similarities to when the company launched AWS in 2006 out of internal services that were honed to run the company’s e-commerce business at massive scale.

• Investors should note that Amazon already offers freight and fulfilment and distribution services, although these have been used mainly by the company’s sellers. 3M, for example, has been using Amazon Freight Services for years to move products from manufacturing sites to distribution centers.
• The parcel delivery announcement is the newest of the news associated with these developments. We think the motivation is the same, to increase utilization of existing assets, but the news is sending shares of other common carriers down on May 4.

The bottom line: We maintain our fair value estimate of USD 280 for wide-moat Amazon as we view the announcement mostly as a continuation of what it was already doing. Over time it is possible Amazon could benefit from being a one-stop shop with a full menu of supply chain services.

• We are not convinced Amazon wants to materially ramp spending in these areas given the investment cycle currently being driven by AWS (by a wide margin), delivery network, and facility modernization. We look forward to any new disclosures management may provide around this business.
• Further, we note e-commerce and logistics are both low-margin businesses, with Amazon’s North America and International segments generating 7.0% and 2.9% GAAP operating margins, respectively. A corresponding group of supply chain providers generates operating margins of approximately 6%.

Big picture: Amazon has earned attractive returns over time and has shown an ability to exit a segment if it is not working.