Has Amazon Found the Next AWS?

Amazon (AMZN 0.97%) is currently the leader in cloud computing. The company’s Amazon Web Services (AWS) is one of its biggest drivers of operating profits, as its core e-commerce business carries notoriously low margins. AWS still has attractive long-term prospects. CEO Andy Jassy noted in a letter to shareholders that 85% of IT spend still occurs on-premises.

As this spending moves to the cloud, Amazon should be one of the biggest winners. But has the tech leader found another potential growth avenue that could rival AWS? The company recently announced a new business segment, prompting investors to wonder whether that’s the case. Let’s look into it and decide what it could mean for investors.

Image source: The Motley Fool.

ASCS has entered the chat

Amazon spent years and a small fortune building a logistics network. It features transportation assets for long-distance shipping, massive warehouses, delivery drivers, and various tools for route optimization, analytics, and more. The company did so to offer free, fast shipping to its customers. This has paid off. Perks like free shipping, overnight delivery, and others arguably attract more shoppers to the platform and encourage them to spend more. But this network was primarily open to businesses within Amazon’s ecosystem, including those selling on its website. That is now changing.

Amazon recently announced the launch of Amazon Supply Chain Services (ASCS), which will grant other businesses access to the company’s logistics network. Notice the similarity with AWS. With the latter, Amazon built a large computing infrastructure and rents it to other companies via a cloud-based model. With ASCS, the company built a massive logistics network and will now rent it out to other companies, allowing them to avoid the cost of building their own. This could become a popular service.

Although e-commerce has become far more popular than it once was, it still has plenty of room for growth. Andy Jassy has said that 80% of retail commerce still happens in brick-and-mortar stores, and that will change over the long run.

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NASDAQ: AMZN

Amazon

Today’s Change

(-0.97%) $-2.65

Current Price

$270.03

Key Data Points

Market Cap

$2.9T

Day’s Range

$269.19 - $270.46

52wk Range

$196.00 - $278.56

Volume

39K

Avg Vol

50M

Gross Margin

50.60%

Meanwhile, free and fast shipping, which is standard on Amazon, is still lacking at many other companies. These retailers might see an opportunity to improve their e-commerce operations by leveraging Amazon’s logistics network. According to Amazon, major corporations such as Procter & Gamble, 3M, and American Eagle Outfitters have already signed up for ASCS. Further, like AWS, ASCS could potentially boast higher margins than Amazon’s core e-commerce business.

The initial investment to build data centers and the entire AWS infrastructure was massive, but now that it is up and running, incremental costs per additional customer are relatively low. Perhaps we might see something somewhat similar with ASCS. It may not be as high margin as AWS (ASCS will face significant operating expenses, including labor and fuel costs), but it may well become a stronger profit driver than Amazon’s e-commerce operations.

What does this mean for investors?

Of course, it’s still too early to tell whether ASCS will be nearly as successful as AWS. Rival companies may choose not to use Amazon’s logistics network, or ASCS’ margins may be crushed by the various costs it will incur. These are all possibilities investors have to keep in mind: Amazon’s new business venture isn’t a slam dunk yet. However, this initiative is another example of Amazon’s creativity and innovation, the kind that helped it become the leader in e-commerce and cloud computing.

Even without ASCS, Amazon has excellent growth prospects across its cloud, artificial intelligence, and advertising businesses, as well as other potentially attractive opportunities, such as its healthcare ventures through Amazon One Medical. Amazon also has a large customer base, with more than 200 million Prime members, and could find more ways to monetize this audience in the future.

Further, the tech leader has a wide moat through switching costs, the network effect, and a strong, recognizable brand name that effortlessly attracts customers to its platform. For all those reasons, Amazon’s shares remain very attractive, regardless of whether ASCS succeeds or not.