Amazon.com, Inc. (NASDAQ:AMZN) has been increasing its fulfillment centers at a rapid pace in the last few years
Amazon had 58 fulfillment centers in 2014. This increased to 168 in 2019. The massive growth has also increased the labor cost for the company.
Since 2014, the revenue increased by 160% while the employee headcount has increased by 320%. At the same time, Amazon has introduced a minimum wage of $15 per hour. This ends up having an adverse impact on the margins. For the past few years, we have seen a rapid increase in fulfillment and shipping expense which exceeded the sales growth. Hence, automating the fulfillment centers is an ideal goal for the company. A large chunk of future margin growth and better sentiment towards Amazon stock would depend on the automation ability of the company.
AMZN Stock Automating the Tough Jobs
The job of boxing up customer orders has until now been very difficult to automate. This job requires robots to handle the most delicate objects in a precise manner. At the same time, the sheer variety of objects is immense, which makes it difficult to create automation programs. But with the latest machines, Amazon hopes to reduce the manpower required in this job.
The investments have not been minor. At $1 million per machine, the total investment would reach over $50 million for all the fulfillment centers in the U.S.
The ability to make such a massive upfront investments gives Amazon a big lead over other retailers. Almost every other retailer aside from Walmart (NYSE: WMT ) would find it difficult to replicate such investments. The long-term result of this is that Amazon’s operational efficiency would be much higher than other peers. This will improve the moat for the company and increase the valuation multiple of Amazon stock.
This machine works five times faster than a human. This should help Amazon in reducing fulfillment time. The company has already announced the move to one-day shipping for all Prime members.
To be fair, Walmart has also announced next-day shipping. But this will only be available for 200,000 items. Amazon would be providing one-day shipping for millions of items.
A PR Problem and Margin Improvement
Automation and loss of jobs is a big issue within the entire economy. Amazon’s move to increase the pace of automation can bring a further backlash against the company. The management has already tried to downplay this initiative. It has also announced that all the workers would be provided alternative employment in other services within the company.
Although the issue is very sensitive, it is likely that we haven’t seen the end of investment in automation of fulfillment and shipping. The recent improvement in Amazon’s margins was largely due to AWS and advertising segment. But lower fulfillment and shipping costs can also help in improving margins.
In the past few quarters, the growth in shipping costs has exceeded the worldwide paid units. For example, in the latest quarter, the shipping costs increased by 21% while worldwide paid units increased by only 10%. By making these massive investments in different stages of its logistics operation, Amazon hopes to reverse this trend. The shipping cost is also massive. In the latest quarter, it was $7.32 billion. This is close to AWS revenue which was $7.5 billion and higher than advertising revenue which came at $2.7 billion.
Hence, a big chunk of future profits will depend on the ability of the company to rein in the shipping and fulfillment expenses. By making rapid investments in automation, the management can reduce its shipping costs and create a bigger moat by offering faster services. This is one of the main reasons to be bullish over the long term returns for Amazon stock.
Amazon is making a big bet on automation to reduce future operating expenses. The labor cost for the company has exceeded the revenue growth in the last five years as new fulfillment centers were opened. By automating major tasks in the fulfillment jobs, Amazon should be able to reduce its expenses and expand margins.
The big investments in automation will also reduce the shipping time. This gives Amazon a lead over other retailers. Few retailers have the resources to make this level of investment. This should cause further consolidation in the retail space, reducing the pricing pressure on Amazon.
The PR backlash can be minimal if Amazon continues to move redundant workers to jobs in other services. Investors should closely watch the growth of shipping and fulfillment expenses in the next few quarters. Reduction in these expenses should help the company in reporting better-operating profits and boosting the returns for Amazon stock.
Overall, the bias in prices is: Upwards.
The projected upper bound is: 1,964.19.
The projected lower bound is: 1,793.76.
The projected closing price is: 1,878.97.
A big black candle occurred. This is bearish, as prices closed significantly lower than they opened. If the candle appears when prices are “high,” it may be the first sign of a top. If it occurs when prices are confronting an overhead resistance area (e.g., a moving average, trendline, or price resistance level), the long black candle adds credibility to the resistance. Similarly, if the candle appears as prices break below a support area, the long black candle confirms the failure of the support area.
During the past 10 bars, there have been 7 white candles and 3 black candles for a net of 4 white candles. During the past 50 bars, there have been 24 white candles and 26 black candles for a net of 2 black candles.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 38.2005. This is not an overbought or oversold reading. The last signal was a sell 7 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 53.51. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a buy 15 period(s) ago.
Commodity Channel Index (CCI)
The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 35. This is not a topping or bottoming area. The last signal was a sell 4 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 11 period(s) ago.
Rex Takasugi – TD Profile
AMAZON COM closed down -35.630 at 1,878.270. Volume was 100% below average (consolidating) and Bollinger Bands were 58% wider than normal.
Open High Low Close Volume___
Short Term: Overbought
Intermediate Term: Bullish
Long Term: Bullish
Moving Averages: 10-period 50-period 200-period
Close: 1,891.31 1,866.96 1,746.56
Volatility: 15 30 46
Volume: 2,718,443 4,169,780 5,548,761
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
AMAZON COM is currently 7.5% above its 200-period moving average and is in an upward trend. Volatility is high as compared to the average volatility over the last 10 periods. Our volume indicators reflect volume flowing into and out of AMZN.O at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bullish on AMZN.O and have had this outlook for the last 5 periods.
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