Quick Take on Amazon's Q1 Results
Amazon notched a 4th straight record profit, but Q1 sales growth slowed to its lowest level in nearly four years. The company also forecasted a lower profit margin in Q2 than Wall Street expected.
But put aside these short-term metrics that Wall Street media pundits like to latch onto. What's the real story here?
Amazon Prime: 2-Day Becomes 1-Day Shipping
Amazon officially announced that it is in the process of migrating all items on Amazon.com, globally, from the classic Free 2-Day Shipping program to a Free 1-Day Shipping program.
This will be a massive competitive advantage in our view.
The company obviously needs to make significant investments in preparing its warehouse & delivery capacity, making certain supply chain changes, and more.
There's a reason why competitors don't offer Free 1-Day Shipping already: it's enormously expensive, complex, and time-intensive. And we like that.
It means this effort will create a moat. Or rather, it will widen the already widening moat around Amazon's flywheel. It's a challenging feat that we think is worth a quarter or two of "missed earnings estimates" or "lowered guidance."
Why 1-Day Shipping?
What is the key strategic rationale behind investing in Amazon 1-Day Shipping as the default Prime shipping option globally?
It comes down to Amazon's three core principles of focus: Price. Selection. Convenience.
By going to 1-Day, Amazon increases the selection and convenience. Many items are already available within 1-2 hours and Same Day, but vast majority is still 2-Day. There is plenty of room to improve selection and convenience, management says.
We believe this move will open up many more potential purchases that customers otherwise would've purchased at, say, the local drug store or big-box store. Think: toilet paper, light bulbs, and other items we don't want to wait two days to receive.
Amazon is the only company in the world that has the capabilities to do this.
It has made massive multi-billion dollar investments in logistics and capacity over the past 20 years. Those costs will now pay off and put competitors further behind, unable to match Amazon on the "convenience x selection" equation.
Long story short, Free 1-Day Shipping will widen Amazon's moat.
One last tidbit: Amazon says they've seen good order trends to date on products that they've moved from 2-Day to 1-Day Shipping on Amazon.com. These trends give them confidence that this Prime shift will drive better sales growth. And we think Jeff Bezos and Amazon management has higher "believability scores" than financial pundits looking at Q1 sales growth as a proxy for the stock price.
The flywheel spins onward…