Amazon's Logistics Network Undervalued Leading RBC to Reiterate Outperform Rating

Kevin Perkins & Nikhil Gunderia

On Thursday, RBC Capital Markets reiterated its Outperform rating and $3,800 price target on Amazon. Amazon seems to be one of the few companies that have and continue to benefit significantly from the pandemic, after almost doubling its stock price since January. However, analysts see more growth in Amazon’s near future thanks to their undervalued logistics network.

Amazon’s network has grown significantly over the past year and continues to develop better than what investors expected. The already dominant e-commerce juggernaut is looking to dominate the logistics market with the buildout of Amazon’s logistics network (AMZL - as the RBC analysts refer to it). Amazon is expected to grow its global distribution footprint by 50% in 2020, which is triple the size the network grew in 2019. Over the span of a few years, Amazon is looking to grow its U.S distribution network by 160mm square feet, which is just as much growth that its main competitor, Walmart, grew its own distribution network over the last half-century!

Through Amazon’s expansion strategy for its logistics network, the company will leverage its ability to deliver a scaled-up selection of their inventory and will also be potentially more reliable than other retail services moving forward. Analysts expect we could see results as soon as the next few months.

“And we believe evidence of this may come as soon as this Holiday Season, when COVID Christmas conditions will likely create substantial demand for Online Retail AND significant logistics challenges”, stated by the analysts.

According to data analyzed by the Capital Markets team at RBC, one of the fastest-growing parts within Amazon’s logistic network is the delivery stations, the facilities that are closest to the end consumer. With the number of delivery stations growing 17x since 2015, Amazon has the opportunity to save $2-$6 billion in “last mile delivery costs”. Similarly, if the growth of the delivery stations continues, Amazon could see 50% lower per-unit shipping costs versus retail competitors.

Adding on to its success, Amazon is aiming to become the global leading 3P delivery service and carrier. The ability to develop such an extensive logistics network will allow Amazon to stop relying on companies such as UPS and FedEx. Limiting their utilization of UPS & FedEx services, Amazon will hedge against potential price increases for delivery services. Not only will Amazon reduce reliance on other shipping companies, but they have the potential to create a dominant “Shipping With Amazon” service that would compete with UPS and FedEx in a market with a global TAM of $300 billion.

Amazon still has tremendous potential for growth even after the stock almost doubled in the past year. So, are you a buyer at these levels? Give us your thoughts in the comment section below!

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Disclosure: At the time of publication, we are long Amazon. We wrote this article ourselves, and it expresses our own opinions. We are not receiving compensation for creating this article (other than from TheStreet) and have no business relationship with any company whose stock is mentioned in this article. 

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