Is This Amazon’s Next $100 Billion Opportunity?

Amazon (AMZN -0.68%) has gone from a small online bookseller to the leading company in multiple markets, and it could have its eye on another $100 billion opportunity.

Amazon’s core e-commerce business already generates more than $300 billion in net sales per year. The run rate of its cloud computing platform, Amazon Web Services (AWS), surpassed $100 billion in the first quarter. Advertising is already a $50 billion business and still growing quickly. Its Amazon Prime subscription service, which includes fast shipping and a streaming video platform, combined with its other subscription services, adds another $40 billion-plus to the company’s top line.

In that context, if Amazon’s going to pursue another business opportunity, it has to be big. It has to have the potential to reach $100 billion. And Amazon may be sitting on everything it needs to create such a business.

Image source: Amazon.

Capitalizing on its big investments

Starting in late 2019, Amazon started rapidly expanding its fulfillment network footprint. Over the next two years, it roughly doubled its network of warehouses, fulfillment centers, sorting centers, delivery stations, and transportation hubs.

It took its foot off the gas pedal in 2022 and 2023, when it focused more on building out its data centers for AWS. Over the past year, Amazon has focused on how to get more out of its expanded footprint. Now that the network is so large, management decided to reconfigure it from a centralized nationwide network to one organized regionally. That shift has cut costs and improved shipping speeds for customers.

With its massive network and regionalized operation, it’s well positioned to offer more logistics and shipping operations for non-Amazon packages. While it has dabbled in that market in the past, it has made more concerted efforts lately.

First, it launched Buy with Prime in April 2022. That feature allows merchants to offer customers the option to use Amazon Prime shipping benefits for orders on other websites. The feature was initially only available to merchants who sold on Amazon and used its Fulfillment by Amazon (FBA) service. But access has since been expanded to third-party sellers that use its latest logistics offering, Supply Chain by Amazon.

Supply Chain by Amazon allows merchants to put their supply chain management in Amazon’s hands. Amazon will take shipments directly from factories and suppliers and place them in its warehouses. It then strategically forwards inventory to its fulfillment centers, and keeps stock levels optimized for fast delivery speed and low cost. It’s the exact same process Amazon uses to handle its own products.

Shipping and distribution could grow to become a $100 billion revenue generator for Amazon, according to Truist analyst Youssef Squali. CEO Andy Jassy said, “It’s already what I would consider a reasonable-sized business. And I think it’s just really early days,” during Amazon’s first-quarter earnings call in April.

Importantly, Jassy doesn’t see it as a capital-intensive business. The company is merely taking advantage of the capacity and systems it has already built. Amazon will continue to add capacity with modest increases for third-party supply chain customers.

A potential needle-mover for Amazon stock

Amazon’s logistics segment is not going to grow from $0 to $100 billion in a few years. These things take time. But there’s a serious opportunity for Amazon in logistics, and it could significantly increase its bottom line and free cash flow.

To put things in perspective, Amazon already ships more packages than UPS or FedEx. It has the capacity to ship even more, and it’s continuously expanding its network, even if it’s not doing so at the breakneck pace of 2020 and 2021.

Both UPS and FedEx generate around $90 billion in revenue per year. UPS has a market cap of about $115 billion, while FedEx’s is about $61 billion. Amazon’s logistics business would arguably be worth even more because the capital expenses required would be pulling double duty as part of its overall e-commerce operations. That’s worth noting because with Amazon already worth about $2 trillion, it takes something major to move the needle on the stock.

At its current price, Amazon stock still looks attractive. Its enterprise-value-to-sales ratio is about 3, and it trades at 42.5 times free cash flow. The former is around its 10-year median, while the latter is near the bottom end of its historic valuation range.

If Amazon’s logistics business takes off, that could be the next catalyst driving its stock higher.