How Amazon’s Logistics Ambitions Can Impact UPS

With Amazon launching its own delivery service, should logistics giants such as UPS (NYSE:UPS) be concerned?  What potential impact could such a move by Amazon have on UPS’s earnings and valuation? To answer this question, we have created an interactive dashboard which gives brief step-by-step overview of the magnitude of UPS’s potential EPS and share price decline, should Amazon move its shipping in-house and/or start catering to customers who aren’t using its platform, thus stepping on UPS’s toes. We find that although UPS is one of the biggest shipping partners for Amazon, the threat will become real only if Amazon starts expanding beyond shipping the products that are selling on its platform, and that could take a while if it happens at all. We estimate that the the downside potential for UPS, if Amazon moves its shipping operations in-house, would be less than 5%. On the other hand, if Amazon were to also take away market share (beyond shipping its own products), resulting in 15% volume declines for UPS, the company’s EPS and price could see a decline of 14%-15%. 

Downside Estimates

Per estimates in early 2016, UPS is reported to handle around 30% of Amazon’s 600 million annual shipments. To estimate the number of shipments in 2017 and beyond, we assume 10% annual growth. Amazon’s revenue has grown by 20%+ annually and we assume that around half of that is due to volume growth. This suggests that UPS is likely to handle over 200 million of Amazon’s shipments, implying a revenue exposure of $2 billion considering the expected average shipping revenue per piece of nearly $9.50. We estimate that loss of this revenue would imply a loss of nearly 17 cents in EPS, and a valuation downside of nearly $3.80 per share. That’s not particularly alarming, considering that UPS’s stock was trading at $105 as of February 22. However, the story could be different if Amazon poaches UPS’s other customers. To see the potential impact, view our interactive dashboard for UPS.