Is UPS Stock a Buy as Amazon Volume Declines?

United Parcel Service (UPS), a shipping and supply-chain management company, released its fourth-quarter earnings on Jan. 30. While the Q4 numbers show positive growth, there’s an underlying concern about the company’s relationship with its largest customer, Amazon (AMZN).

Amazon’s Impact on UPS

UPS showed impressive revenue growth, operating profit expansion, and margin expansion in Q4. This marks the first time in three years that the company has delivered growth across all three of these financial metrics in the fourth quarter, signaling momentum.

Despite these positive results, UPS’ announcement that it has reached an agreement with Amazon to reduce shipping volumes significantly tainted the company’s better-than-expected earnings. 

UPS disclosed that Amazon will cut its volume with the company by more than 50% by the second half of 2026. The news was enough to send UPS stock down over 14% on Jan. 30.

The decline in the volume UPS ships for Amazon has already begun and will continue to accelerate over the next 18 months. Although losing a significant portion of volume from Amazon may seem like a blow, it aligns with UPS’ long-term strategy of focusing on higher-quality revenue streams and serving customer segments that offer better margins and customer mixes. This strategic shift will also reduce customer concentration risk, result in higher revenue per package, and strengthen the company’s prospects.

Shifting Focus Toward High-Value Segments

UPS is deliberately shifting its focus toward high-yield volume and value share. While lower volume from Amazon may lead to decreased revenue in the short term, UPS expects to make up for this by increasing its revenue per piece through a more favorable customer mix. The company will also leverage its advanced pricing technology, which played a key role in delivering substantial base rate improvements in the second half of 2024, especially from enterprise and small to medium businesses (SMBs).

UPS is targeting growth in its SMB, healthcare, and B2B sectors, where it sees the most potential for long-term expansion. Further, UPS expects the SMB segment to account for 32% of its U.S. volume this year, continuing its momentum into the future.

Cost Reductions and Capacity Reconfiguration

As UPS reconfigures its network capacity and reduces its overall volume, the company will simultaneously lower its costs by cutting hours, miles, and other fixed costs associated with the lower volume. UPS has plans to close up to 10% of its facilities, reduce its vehicle and aircraft fleets, and cut labor costs. These measures will allow UPS to better match its capacity to expected volume levels and accelerate its growth. Moreover, by optimizing its U.S. network and investing in automation, UPS aims to run more efficiently and decrease capital requirements.

These steps are expected to help alleviate concerns about the potential impact of Amazon’s volume loss, as UPS is positioning itself to improve shareholder value through higher dividends and share repurchases.

SurePost and Efficiency Initiatives

In addition to adjusting its customer mix, UPS made important changes to its SurePost service, which is designed for lower-value, less urgent shipments. As of Jan. 1, UPS began handling 100% of its SurePost volume in-house and implemented a 9.9% average rate increase for the service. These changes grant UPS greater operational control and allow for better service delivery, which is important in maintaining value within its product portfolio.

With the lower volume and a reconfigured U.S. network, UPS expects to boost efficiency, anticipating savings of about $1 billion through its “Efficiency Reimagined” program.

Analyst Outlook and Future Growth

Given the short-term headwinds, Wall Street analysts maintain a “Moderate Buy” consensus rating for UPS stock. 

The company is well-positioned to expand its U.S. domestic operating margin in every quarter of 2025, with a projected full-year operating margin of 9%. As the impact of its cost-cutting initiatives begins to take hold over the next 18 months, UPS expects its operating margin improvement to accelerate into 2026, with a target of achieving a 12% U.S. operating margin by the fourth quarter. Management also sees significant upside potential over the longer term.

Conclusion

While the loss of Amazon volume is a significant factor for UPS, the company’s strategy to improve its customer mix, reduce costs, and optimize its network suggests that the market’s reaction may be overstated. With a focus on high-margin segments and a commitment to increasing efficiency, UPS remains a strong player in the logistics space, with solid potential for growth and profitability in the coming years.