Imagine this: You're headed to work and realize you forgot to order laundry detergent from Amazon.com (AMZN -2.42%). You say, "Alexa, order laundry detergent," and the virtual assistant confirms your choice of brand, size, and price. When you get to work, your wife calls and says she needs the car earlier than expected today and your daughter needs a ride to soccer practice.
You tell your wife, "No problem." You open the Amazon app on your phone and then schedule a car to pick up your wife, grab your detergent at the Amazon warehouse, pick up your daughter for soccer, and return to get you later in the day.
This may be the future that Amazon imagines with its acquisition of driverless start-up Zoox.
At the core, it's not even close
Amazon bled red ink for years to grow its brand. The company's massive bet in growth has paid off, as eMarketer reported that Amazon took 38% of U.S. e-commerce sales in May 2020. The next four closest competitors comprised less than 16% of the market combined. In addition, online sales are expected to climb 18% this year, while retail sales are projected to decline by more than 10%.
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The combination of the pandemic and the rise of one-day shipping helped Amazon's online revenue increase by 24% annually last quarter . The company's third-party sellers benefited as well, with third-party services revenue up 30%.
Amazon continues to ramp up one-day shipping. Along with other investments, capital expenditures increased 106% year over year to $6.8 billion. Amazon's core strengths give the company a solid base from which to expand. One of the company's biggest growth engines is Amazon Web Services (AWS).
It's grow time!
In late 2003 , the concept of selling access to virtual servers was floated as a way for Amazon to generate revenue from its infrastructure investments. In 2006, AWS began offering IT infrastructure services to businesses. The point is that AWS wasn't dreamed up as a stand-alone business. Amazon used it to generate revenue from ventures it already was spending money on.
In the first quarter of 2020 alone, AWS' $10 billion revenue represented 13% of the overall total. AWS generated more than 77% of the company's operating income. In the last conference call, CFO Brian Olsavsky said the company is benefiting "from being able to use our server and infrastructure assets for a longer time period." This isn't a short-term phenomenon; Olsavsky suggested the company will see this benefit "from here on out."
Amazon generates billions in profits from a business that originated in infrastructure investments. With the Zoox acquisition, Amazon is looking to duplicate that success.
An $11 billion problem turns into a $170 billion opportunity
In Q1 2020, Amazon spent $11.5 billion on fulfillment, which represented 15.3% of the company's quarterly revenue. During Q1 2019, Amazon spent $8.6 billion on fulfillment, which was 14.4% of revenue. When one of your biggest costs is becoming a bigger percentage of your revenue, it's a problem that must be addressed.
Zoox's goal is to make mobility an on-demand service . This isn't the first time Amazon has invested in driverless technology. Amazon invested in Aurora Innovation, led by former Tesla (TSLA -4.06%) employees and one of the heads of Alphabet's (GOOG -0.63%) (GOOGL -0.70%) driverless car project. In addition, Amazon invested in Rivian Automotive, an electric pickup and SUV designer.
If Amazon can turn Zoox into a partial solution to its fulfillment costs, the acquisition will have been well worth the reported $1.2 billion cost . This brings to mind Amazon's Kiva Systems acquisition. Amazon paid $775 million to acquire the robotics company in 2012. Estimates in 2017 suggested that Kiva robots were saving Amazon as much as $22 million per year at each warehouse. The estimated net present value of this acquisition was about $15 billion. Given Amazon's move toward one-day shipping and constant warehouse expansion, this looks like one of the better investments in its history.
Initial estimates suggest that Zoox could one-up Kiva by generating as much as $20 billion in annual cost savings. Amazon spent over $40 billion on fulfillment during 2019, which represented an annual increase of 18%. Amazon's fulfillment costs will likely increase each year for the foreseeable future as e-commerce continues to grow.
Though saving billions might be enough for most companies, Amazon is likely looking at Zoox as one of its next big growth drivers. The self-driving car market is expected to reach $173 billion by 2023 , with a compound annual growth rate of more than 36%. If Amazon is going to have self-driving vehicles for package delivery, why not deliver people while they're at it?
Amazon isn't alone in this industry. Tesla is expected to generate about $27 billion in total sales during 2020, primarily from electric vehicles. Google's Waymo business was once thought to be worth more than $100 billion. Though that moonshot has been curtailed to estimates of $30 billion, it's still a contender.
Tesla builds vehicles to make money, Alphabet primarily relies on advertising, and Amazon deals in e-commerce. Yet for these three companies, Mobility as a Service could become a massive opportunity. In the same way that AWS was born out of the necessity of infrastructure investments, or that the Kiva purchase was about driving down costs, Zoox looks like the next great investment from Amazon.
Investors looking at buying Amazon shares shouldn't be scared of jumping in near the stock's all-time high. If the company's vision for Zoox is realized, ordering a car to pick you, your family, and your laundry detergent up could be just a tap away.
