Amazon (AMZN -1.07%) just took another step toward becoming a major logistics provider.
Shopify (SHOP -5.62%) merchants will soon have an easy (and approved) way to offer Amazon's "Buy with Prime" to customers at checkout. Buy with Prime launched last year, allowing shoppers on websites outside of Amazon.com to use their Prime membership to receive fast shipping and pay with their Amazon wallet. Shopify previously said merchants that added the service to their website violated its terms of service.
While the terms of the new deal concede valuable payment processing revenue to Shopify, Amazon gains access to Shopify's merchants and customers, expanding its logistics segment.
Building its next $10 billion business
Amazon has built out a massive logistics network over the last decade. The volume of packages it delivers rivals the biggest competitors in the space.
It's invested a lot of money to get here. The company saw its capital expenditures climb to $58 billion last year after spending $55 billion in 2021. While a lot of that went to expanding its cloud computing business, it's still spending more than ever building out its fulfillment network footprint.
But now, Amazon has a massive network that's practically impossible to compete with. Just ask Shopify.
Shopify tried to create its own logistics network for merchants. After spending $2.1 billion to acquire Deliverr in 2022, Shopify spent hundreds of millions building out its logistics business. It lasted a whole year before the company abruptly sold it to Flexport.
The deal with Shopify is just the latest step in a series of moves Amazon's made to start utilizing its logistics network more efficiently.
At the start of the year, the company reorganized the logistics operation to operate separate regions throughout the United States. That reduced expenses while speeding up deliveries for Amazon.com customers.
Earlier this month, Amazon resumed its Amazon Shipping service. The service gives merchants the option of using Amazon's logistics network without having to use its warehouses. Amazon will send a driver to pick up packages from a merchant's own warehouse instead.
The Shopify partnership will still only apply to merchants who also sell items on Amazon with its Fulfilled by Amazon service. However, it's not hard to imagine Amazon eventually expanding the offering to all products on Shopify. And at last count, Shopify had "millions" of merchants (read: 2 million) and 560 million unique customers across its platform. Gross merchandise volume in 2022 totaled $197 billion. That's a huge addressable market -- even for Amazon.
What it means for investors
Amazon investors should be cheering any move the company makes to improve utilization of its fulfillment network.
After spending heavily to build out its footprint, Amazon saw its free cash flow turn negative. While it's reported strong improvements in 2023, the company needs to show it will produce a positive return on that capital investment.
As Amazon expands the logistics business outside of its own web store, it should be able to produce sustained growth. Investors will likely see the revenue reported under third-party seller services in its earnings.
The long-term potential of the logistics business is massive. And it needs to be to move the needle for a company the size of Amazon.
The online retail giant didn't break out AWS results until it surpassed $5 billion in annual revenue. Advertising didn't get its own line item until it surpassed $30 billion. In order for Amazon Logistics to become a meaningful business segment, investors should expect it to become at least a $10 billion business.
With its huge scale, Amazon can offer better pricing while maintaining profit margins comparable to those of the big competitors in the space. And considering the size of the logistics industry, it doesn't have to take that big of a share of the pie to reach $10 billion.
As Amazon scales the business, investors should see a lot of free cash flow come back into the company's coffers. And based on the price the stock is trading at today, investors aren't valuing that future free cash flow highly enough.
