Amazon (NASDAQ: AMZN) may have just sealed FedEx’s (NYSE: FDX) doom by expanding its delivery services.
Morgan Stanley claims Amazon now delivers half of the merchandise Americans order through its platform, CNBC reports. However, Amazon concentrates most of those orders in urban areas.
Dramatically, Morgan Stanley claims its Alpha Wave analysis shows Amazon Logistics could deliver more packages than FedEx; or UPS (NYSE: UPS), by 2022. In detail, Morgan Stanley projects Amazon Logistics could deliver 6.5 billion packages with its good business plan by 2022.
Meanwhile, FedEx delivers 3.4 billion packages a year and UPS five billion packages a year. Those numbers are apparently for the United States.
Amazon could Become America’s Dominant Delivery Brand within Three Years
Consequently, The Verge brands Amazon a “serious rival to FedEx and UPS.” Hence, Amazon could become America’s dominant delivery brand within three years.
Thus, we could live in a country where Amazon is the average person’s first choice for delivery orders. In other words, FedEx’s worst nightmare could soon become a reality.
Notably, Amazon ended its FedEx contracts for ground shipping and air transport earlier this year. However, Amazon still works with FedEx’s arch-rival UPS.
Frighteningly, Amazon could afford to spend $9.6 billion on fulfillment between June and September 2019. The Everything Store can afford such expenditures because it had $43.401 billion in cash and short-term investments on 30 September 2019.
In contrast, FedEx reported just $2.389 billion in cash and short-term investments on 31 August 2019. Thus, Amazon can afford to spend vast amounts of cash expanding its logistics operations, while FedEx cannot.
Is FedEx Making Money?
Currently, the FedEx Corporation (NYSE: FDX) is making money. For example, FedEx reported a quarterly gross profit of $12.15 billion on 31 August 2019.
However, FedEx reported a quarterly operating income of $977 million on revenues of $17.048 billion on the same day. Plus, FedEx’s quarterly operating income fell from $1.316 billion on 31 May 2019. Additionally, FedEx’s quarterly revenues fell from $17.807 billion on 31 May 2019. Yet the quarterly net income rose from $-1.969 billion in May to $745 million in August.
FedEx is still making money but its revenues have shrunk. Notably, Stockrow estimates FedEx’s revenue growth rate fell by -0.02% in the quarter ending on 31 August 2019.
Dramatically, FedEx’s operating cash flow fell from $2.29 billion in May to $565 million in September. In addition, ending cash rose from $-553 million to $2.389 million. Disturbingly, financing cash rose to $942 million. I think these numbers show increased borrowing at FedEx.
Can FedEx Survive?
Presently, FedEx is surviving but the financial numbers offer hints of future struggles.
In particular, FedEx seems incapable of generating enough cash to compete with Amazon. To explain, my theory for Amazon’s success is that the Everything Store can destroy competitors by generating vast amounts of cash.
For instance, Amazon has the cash to build up its own delivery services from scratch in a short period of time. Additionally, has the cash to build dozens of fulfillment centers all over the country that can serve as logistics hubs.
Meanwhile, FedEx lacks the cash to offer such capabilities and relies heavily on Amazon. Currently, FedEx relies on third-party merchandise ordered through the Amazon platform.
However, FedEx delivers merchandise for Amazon’s biggest American competitor Walmart (NYSE: WMT). Unfortunately, Walmart’s share of American e-commerce in March 2019 was 4.6%, Marketing Charts estimates. In contrast, Amazon controlled 47% of US e-commerce.
Hence, it could be impossible for FedEx to survive without Amazon. Yet Amazon is trying to cut FedEx out of its business.
Amazon, FedEx, and Anti-Trust
The Amazon Logistics numbers are sure to jump start the debate over anti-trust in America.
Critics can charge Amazon with building monopolies in both shipping and retail with Amazon Logistics. For example, you can argue Amazon is trying to drive both FedEx and UPS out of business.
One reason Jeff Bezos wants FedEx and UPS dead is to lock competitors; such as Walmart, out of the e-commerce market. Another rationale for Bezos is to make Amazon dominant in grocery delivery.
Why Uncle Sam could Force Amazon out of Delivery
To explain, Amazon could offer a wide variety of merchandise grocers such as Kroger (NYSE: KR) cannot. Amazon Prime could deliver your milk and eggs, and your underwear and new TV set at the same time. All Kroger can deliver is food.
Hence, there will be serious pressure from competitors, consumer advocates, and unions to lock Amazon out of delivery. I suspect politicians will soon launch a campaign to force Bezos to sell or spin-off Amazon Logistics.
Notably, Amazon is facing widening antitrust scrutiny from the federal government, Fortune reports. Federal Trade Commission (FTC) investigators are examining Amazon Web Services’ (AWS) cloud dominance.
AWS accounts for 60% of Amazon’s operating income, so it finances Amazon Logistics. Thus, the FTC could deprive Bezos of the money he needs to build Amazon Logistics with an anti-trust action.
Politicians; such as Donald J. Trump (R-Florida), could ramp up antitrust actions because of the anti-corporate mood in the country. I think Trump’s most probable opponents in next year’s presidential election are anti-corporate leftists; such as U.S. Senators Bernie Sanders (I-Vermont) and Liz Warren (D-Massachusetts). To counter them, Trump could increase anti-trust actions in 2020.
Thus, FedEx’s long-term prospects could be brighter than many think. Success in logistics and delivery could be impossible for Amazon.
Is FedEx a Value Investment?
I think Mr. Market overpriced FedEx (NYSE: FDX) at $163.23 on 17 December 2019. I think the risks in the delivery market do not justify that price.
However, FedEx offered shareholders a dividend yield of 1.58%, an annualized payout of $2.60, and a payout ratio of 16.75% on 17 December 2019. Dividend.com reports that FedEx offers nine years of dividend growth.
FedEx paid a quarterly dividend of 65₵ on 6 December 2019. Thus, I think FedEx is a decent divided stock but Mr. Market overprices it.
I conclude investors need to stay away from FedEx until we see how the political battles over antitrust and Amazon go. FedEx is a moneymaking company that could face a desperate struggle for survival, without federal protection.