Amazon (AMZN 3.43%) spent the past couple of years making moves to fight rising inflation in the near term, but more importantly, these actions should help power strong earnings over time. The e-commerce and cloud computing company cut costs, focused on efficiency across its fulfillment network, and invested in high-growth areas like technology infrastructure.
The efforts have borne fruit over the past few quarters. After reporting its first annual loss in nearly a decade in 2022, Amazon sprung back into action with a $30 billion profit last year.
The list of positive financial metrics is long, but one in particular stands out. In fact, it's something Amazon achieved for the first time in five years, and it makes the stock a buy right now -- even after last year's double-digit share price gain. Let's take a closer look.
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Double-digit sales gains
As mentioned above, Amazon's primary businesses are e-commerce and cloud computing (through its Amazon Web Services, or AWS, unit). E-commerce sales in North America and internationally rose by double digits last year and in the fourth quarter, as did AWS revenue.
And now, Amazon is on the way to maximizing its profit on those sales by tackling a key metric: the cost to serve. Last year, it lowered this metric on a per-unit basis worldwide for the first time since 2018. In the U.S., for example, cost to serve declined more than 45 cents per unit in 2023 compared to the previous year.
This is key for a couple of reasons. First, on its own, a lower cost to serve cuts down on expenses, which is always positive for a business.
Second, a lower cost to serve means Amazon can invest that money saved into speeding up delivery and offering a wider selection of products at lower average selling prices. And faster delivery of a top selection of items at lower prices should drive more people to sign up for its Prime membership program -- meaning they will keep coming back.
The company says recent growth in its essentials sales (items like healthcare and personal care products) proves that faster delivery times are winning over customers -- shoppers generally need these products right away.
And Amazon isn't done lowering its cost to serve. The company says it has evaluated its fulfillment network and has identified several areas where it can continue cutting costs and supercharging delivery, which will be a focus in 2024.
How is Amazon lowering costs?
If you're wondering how Amazon was able to make so much progress in cost to serve, a major factor in this has to do with the structure of its fulfillment network. Last year, the company shifted from a national model in the U.S. to a regional one, bringing inventory closer to the customer. This has allowed the company to reduce transport time (saving on costs), and it means shoppers receive their orders quicker -- a win for Amazon and the customer.
I said above that this makes the stock a buy, but this isn't the only reason to like it. The company has a solid earnings track record. It showed that after difficult times (like in 2022), it can quickly recover and grow, and remains a leader in the high-growth markets of e-commerce and cloud computing.
On top of this, Amazon shares, trading for 40 times forward earnings estimates, look reasonably priced for a growth stock offering investors that kind of package (excuse the pun).
So improvements in cost to serve is excellent news and a great reason to buy the stock, but considering the complete Amazon picture, this might be just icing on the cake.
