Another series that we’ll have as an ongoing feature on our blog is called “Ask the Expert.” We’ll examine an e-commerce or supply chain topic with an expert, such as a Ship Simply employee and or someone from an outside partner company.
Today, I’m going to start by answering the question: Which supply chain stock are you buying?
To disclose right up front, the statements below are my opinion and do not represent a guarantee of positive financial performance. Investing in securities involves risk of loss and should be done with proper caution.
I watch the stock market with particular emphasis on e-commerce and logistics stocks on a daily basis. I keep my eye on 30-40 different stocks in these categories and my selection doesn’t come from a certain financial metric, dividend yield, or anything that you can find on Yahoo! Finance. It comes from my understanding of what is happening in the industry and which company I think is positioned to outperform the average investor’s perspective.
I might be considered a bit cliché with my choice, but I’m selecting FedEx (FDX). I’ll share my perspective on why.
FedEx’s stock has not performed well recently, trading at almost half the price that it was trading at two years ago. For comparison, most other logistics stocks, like UPS (down about 15%) or XPO (down about 34%) have seen a decline while companies with a large logistics element to their business but who have an e-commerce slant, like SHOP (up over 400%) or AMZN (up about 48%) have fared much better, as you would expect. (I do realize Shopify is a stretch, by the way, but stay with me here.)
There are several strategic things at play that I think position FedEx well right now. First, FedEx was founded on innovation. Fred Smith is closing in on the end of his career and it’s no secret that he wants to leave his legacy in a positive place. In recent years, Jeff Bezos has pushed Fred Smith around a bit and I think Fred Smith has at least one more punch left to throw. Pulling Amazon’s contract was a big move for Fred and it has had short-term consequences, but in the long run, it has allowed FedEx to position itself well in the world beyond the Amazon vortex.
FedEx has spent the last few years preparing its network for larger items, spotting the trend to sell furniture, fitness equipment and other large items through e-commerce stores. The ability to move these items effectively through the ground network allows for greater volume of higher margin packages to move more efficiently through their facilities.
FedEx is shifting to compete as much with USPS as with UPS – taking back their SmartPost volume from USPS and expanding their deliveries to seven days a week. Taking control of their SmartPost volume in the short-term has increased the cost of deliveries but the move is about building volume. With SmartPost being the only non-delivery guaranteed service that FedEx offers, its volume serves as a buffer, allowing them to utilize their capacity to move and deliver SmartPost packages when volume for their guaranteed services is lighter. In a way, this strategy is taking a page out of Amazon’s playbook. Amazon’s strategy all along has been to partner with other companies to the point of building capacity far greater than their own needs and then offering it as a product themselves, as they’ve done with AWS, FBA and even with Amazon Shipping. They’ve since iced Amazon Shipping (for now) because of the challenges that creating a true competitor to the likes of FedEx presents.
The FedEx sales team is as aggressive today to win new business and market share away from the competition as ever. It’s all about building the capacity of the network. Regardless of Amazon’s presence and power in e-commerce, there is still enormous opportunity to continue to grow significantly with platforms like Shopify, finding strategies to connect independent e-commerce vendors in ways that make it easier for online shoppers who don’t want to rely on Amazon.
In fact, I expect that there will be a large acquisition in this arena in the mid-term. At one time, I thought FedEx might aim to acquire Shopify, but Shopify has grown so rapidly in market cap that it’s unlikely that a merger of some kind with FedEx would be possible. However, several tech giants and Amazon competitors in other categories may see fit to acquire FedEx due to the complexity of building the network that Amazon has been building independently. For example, a company like Facebook, who is pushing further into e-commerce of late with Facebook Shops, could be an interesting fit.
Keep a watch on FedEx and don’t count Fred Smith out just yet. I think they are one of the best buys in e-commerce and logistics stocks at the moment.