Stamps.com (NASDAQ:STMP) had a bad day on Wall Street after reporting its fourth-quarter earnings. The Q4 results were fine, but the news that the company is ending its exclusive partnership with the USPS sent shares plunging. The stock fell nearly 58% after the company forecast its net income would decline 63% this year as a result of ending its relationship with the Postal Service.
One analyst asked, "Why now?" on the company's fourth-quarter earnings call. To that, CEO Ken McBride had a straightforward answer: Amazon (NASDAQ:AMZN). "Something pretty significant happened in the last month, which is Amazon came out and they said, 'Hey, we're going after shipping.' And it was the first time they have publicly acknowledged that," he answered.
Sacrificing two-thirds of net income this year for the chance to court Amazon as a shipping partner is a pretty big bet.
A significant force in the shipping business
McBride and the Stamps.com team don't have any information about Amazon's plans in shipping and logistics that the rest of investors don't have. That said, it's their business to pay attention to the trends in the industry and guide Stamps.com to maximize value. To that end, McBride thinks it's essential to partner with Amazon to ship packages.
"We would expect over the next five years that Amazon is going to become a significant force in the shipping business," he told analysts. "They're going to do so by coming in with very aggressive pricing. And so we have to bring that solution to our customers."
McBride pointed out that e-commerce is what's been driving growth at Stamps.com. Amazon has built out a logistics network specifically designed for e-commerce. Other carriers have legacy logistics networks that weren't necessarily built with two-day Prime shipping in mind.
That means Amazon is able to ship items from its warehouses faster and cheaper than competitors. In fact, Amazon CFO Brian Olsavsky told investors exactly that on the company's fourth-quarter earnings call.
Amazon has already started testing a service called Shipping With Amazon, which it launched in November in Los Angeles and London. Amazon isn't charging any additional fees like residential or fuel surcharges for delivering items to customers' homes, and its pricing is about 10% below the competition as a result.
Expanding the business
Currently Shipping With Amazon only supports select third-party sellers on Amazon's marketplace. But McBride suggests that'll change within the next few years. "They are going to take that network and they are going to offer up the capacity, the excess capacity above their own packages to customers," McBride said.
It's a similar model to how Amazon built Amazon Web Services, its cloud computing business. With massive fixed costs offset by Amazon's own internal needs, the company can offer the service to other businesses at a relatively low marginal cost. It's actually a playbook Amazon executes frequently.
McBride seems to think that expansion will happen within the next five years based on management's commentary. It's certainly a massive opportunity, but given that Amazon still only ships around one-quarter of its own packages, it still has a lot of work to do internally.
But investors shouldn't expect Amazon to waste much time scaling the business when it does enter the market. Take a look at Amazon's burgeoning advertising business as an example of how quickly the company takes an idea from practically $0 to $10 billion.
McBride summed it up perfectly: "Amazon's track record of disrupting an industry is well-established. So their threat should be taken very seriously by every player in the shipping industry."