The e-commerce industry has seen its fair share of ups and downs over the past few years, but one company seems to be bouncing back stronger than ever. Amazon's (AMZN 0.79%) e-commerce segment had a tough year in 2022, but it has turned results around so far in 2023.
With its ever-expanding customer base and a vast selection of products, Amazon seems poised for future success. Let's look at what's driving Amazon's e-commerce rebound and why it might be a wise investment choice for those willing to take the plunge.
Better logistics improves the customer experience
It's easy to understand why Amazon's e-commerce division rebounded in the first half of 2023. The company invested heavily in enhancing its online shopping platform during the recent downturn, and shoppers have certainly taken notice. With a more seamless and enjoyable experience, it's no wonder customers keep coming back for more.
The most important thing management did to improve the customer experience in the U.S. during the last several years is switch from storing inventory in a single national fulfillment network to distributing that inventory across eight interconnected regions. Regionalization has several benefits that help Amazon improve the shopping experience for its customers.
First, it can help to improve delivery speeds. When inventory is stored closer to customers, it takes less time to deliver orders. And shoppers tend to buy more frequently when Amazon promises faster delivery on a product page -- not just a little more, but significantly more. In addition, knowing that they can receive their orders quickly also affects customers' decision to use the platform for future purchases. The company has data to support these findings.
Second, regionalization can help to reduce costs. By storing inventory in multiple regions, Amazon can avoid transporting products long distances and save the company money on transportation costs. The strategy also lowers the environmental impact of transportation as Amazon travels fewer miles and emits less carbon dioxide.
The company's regionalization efforts are having measurable success. Halfway through 2023, Amazon has delivered more than 1.8 billion packages to U.S. Prime members the same or next day, nearly 4 times what it delivered at those speeds at a similar point in 2019. In addition, by lowering logistics costs, it can use the savings to add more products at lower price points.
Lately, Amazon has focused on expanding its range of everyday essentials. This move has been a blessing for customers who now have the option to shop online for toiletries and cleaning supplies instead of driving to the nearest store. The company's management believes this product expansion has resulted in a measurable increase in e-commerce basket sizes and more frequent shopping with Amazon.
Its regionalization efforts face risks
Amazon could encounter several obstacles in its regionalization efforts. For instance, customer demand and preferences can vary significantly based on seasonality, demographics, trends, and events. Plus, the artificial intelligence (AI) it uses to analyze customer data to forecast which products will be in demand in different parts of the country can make mistakes. As a result, management must continuously monitor and update its inventory placement strategy to align with customer expectations and avoid having too much or too little inventory.
Another risk is that other e-commerce platforms and retailers may adopt regionalization strategies or offer quicker and more cost-effective delivery options. Walmart, Target, Costco Wholesale, and Shopify are among the competitors that have invested in expanding their fulfillment networks and enhancing their logistics capabilities. Amazon must distinguish itself by providing unique products, niches, and value propositions that resonate with customers in different regions or lose market share.
U.S. e-commerce returns to profitability
One of the factors contributing to Wall Street's renewed optimism on Amazon is the company's U.S. e-commerce segment, which returned to profitability during the first six months of this year. That's a significant turnaround from the quarterly losses incurred throughout 2022, as seen in the chart below.
Image source: Amazon. TTM = Trailing 12 months.
Amazon's North American segment operating margin recovered from a low of negative 2.3% in the first quarter of 2022 to reach 3.9% in the second quarter of 2023. The company achieved this gain in several ways, including reducing headcount and freezing hiring. The goal was to cut costs in its retail business, which faced challenges from inflation, slowing demand, and rising wages.
To improve efficiency and productivity, it has relied on more automation, AI, and software. It has been investing heavily in automation for years, which is likely to accelerate in the wake of the layoffs and hiring freeze. One of the more significant automation investments is using robots to handle product picking, moving, and packaging in its warehouses.
In 2021, Amazon released its "first fully autonomous mobile robot," Proteus, to move large package containers throughout its warehouses. In the same year, it also released Cardinal, a mobile robot that uses computer vision and AI to identify, select, lift, and place individual products in a cart.
Having seen the above measures, including its regionalization efforts, paying off in growing profitability, investors have boosted the stock price by over 50% this year. Yet its price-to-sales (P/S) ratio is still well below its median P/S ratio for the past three-, five-, and 10-year periods, as seen in the chart below.
AMZN PS Ratio data by YCharts
Considering that many economists expect the economy to improve over the next several years, now may be the time to invest in e-commerce since it benefits from increasing economic activity. If you are looking for a company on the rise again that is well-positioned for the coming bull market, consider putting Amazon on your buy list.
