Amazon: Expanding An Uber-Like Logistics Service

| About:, Inc. (AMZN)
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AMZN is expanding its on-demand delivery service, AMZN Flex.

Expect a gradual decline in capex for AMZN and an improved logistics experience.

Remain bullish on AMZN's long-term outlook.

Reuters reported that Amazon (NASDAQ:AMZN) is quietly inviting drivers to join its on-demand delivery service called Amazon Flex. The service essentially contracts drivers that deliver parcels on behalf of AMZN to ensure speedy delivery of common household goods for AMZN Prime customers. In the near term, the biggest beneficiary of this service will be AMZN given that an improved logistics system is accretive to the user experience and this leads to long-term expansion of the Prime ecosystem, which will further drive AMZN's core e-commerce business.

Additionally, AMZN Flex could potentially become a more efficient logistics platform that could potentially disrupt the conventional logistics model dominated by FedEx (NYSE:FDX), UPS (NYSE:UPS) and USPS. Not only does Flex allow AMZN to scale up its footprint but also allows AMZN to create a competitive logistics company that could be used as an alternative to the big 3. In short, I believe that this is the right strategic direction for AMZN by vertically integrating all aspects of its business, but I also acknowledge that near-term spending on logistics will continue to weigh on the profitability potentially within this decade.

AMZN Flex operates similar to Uber in that it's an app-based platform that connects contract drivers to fulfilment centers where the drivers will pick up packages to be delivered to customers. The program is currently available in 14 cities including Seattle, Las Vegas, Phoenix and Dallas. The qualification to become a driver is achievable by most car owners (ie. mid-size sedan or larger, four-doors). The driver will be paid an introductory rate of $18/hour and can schedule shifts between 8 am to 4 pm. Assuming eight hour days, that would be $144/day pre-tax salary, or roughly $3,100/month. However, a Flex driver could earn up to $25/hour plus tips, and the flexible work hours make this job is a very attractive proposition for part-time workers such as nurses, real estate agents, restaurant workers, administrative employees or recently unemployed individuals. On the flip-side and similar to Uber, drivers are responsible for their own insurance and gas. Given the lower gas environment we are enjoying, I do not think this should be an issue.

In my view, sending more deliveries through its own logistics platform allows AMZN to have more control over the quality of the delivery and the cost. This is particularly important when consumer expectations of faster delivery and lower cost is rising for the e-commerce model. AMZN has successfully achieved a portion of this equation with Prime which provides free unlimited two-day delivery (ie. zero cost) but the last-mile execution has yet to live up to their expectations. As such, AMZN is addressing this weakness and this will potentially be another decade-long investment for the e-commerce giant.

Conclusion, for investors who are looking for profitability, they are certainly going to be disappointed. However, several key trends worth highlighting that supports my long-term view on the stock: 1) e-commerce penetration in the US still has a lot of room to go driven by the shift in consumer spending habits and demographics, 2) Prime ecosystem will continue to draw shoppers that have above average spending habits, and 3) AMZN's entry into financial services (ie. short-term loans to merchants and customers) could be a potential catalyst for higher e-commerce adoption.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.