The recent surge in Amazon shares on the (NASDAQ: AMZN) has investors grinning from ear to ear. Over the past six months, the stock has soared a remarkable 45% and is already up by 22% year to date, hitting record highs in 2021. With a hefty market capitalization of $1.93 trillion, the optimism among investors is palpable, driven by robust e-commerce profitability and a resurgence in cloud computing, fueled by the AI boom.
The E-Commerce Boom and Profit Growth
Despite Amazon’s nearly 30-year history in the online retail space, its e-commerce and retail businesses continue to expand rapidly. In 2023, North American sales surged by 12% to $353 billion, while international operations saw an 11% uptick to $131.2 billion.
Although Amazon dominates the e-commerce landscape, online sales currently represent a mere 15.6% of total U.S. retail sales, indicating ample room for growth ahead. With the rise of third-party seller services and advertising revenues, which posted impressive jumps of 19% and 26% respectively, Amazon’s profit margins have been on an upward trajectory. North American operating margins touched 6.1% in Q4 of 2023, marking a significant rebound from negative territory in Q4 of 2022.
The Cloud Computing Comeback
Amazon Web Services (AWS), the crown jewel of Amazon’s profit portfolio, raked in over $90 billion in sales and $24.6 billion in operating income in 2023, boasting a robust profit margin of 27.1%. Despite concerns of a slowdown in AWS in late 2022 and early 2023, recent revenue accelerations, especially in Q4 2023, quelled investor fears.
With the emergence of AI services driving cloud demand and Amazon’s strategic positioning alongside competitors such as Google Cloud and Microsoft Azure, AWS is poised for continued growth. Over the next decade, the cloud computing sector is projected to sustain double-digit annual growth, a trend that Amazon is well-positioned to capitalize on.
Predicting Amazon’s Trajectory in Five Years
Forecasting Amazon’s stock performance in the next five years requires a projection of profits for both e-commerce and AWS. Estimating a 12% annual growth rate for e-commerce sales and an expansion of profit margins to 10%, coupled with a 12% growth in AWS revenue and steady 27% profit margins, could yield a combined earnings figure of $105 billion in 2028.
Assuming a market premium due to Amazon’s strong market dominance in both e-commerce and cloud computing, a price-to-earnings ratio of 30 times earnings could result in a market cap of $3.15 trillion in 2028, implying a robust 66% upside from current levels.
Final Thoughts on Investing in Amazon
While the future trajectory of Amazon stock looks promising, with significant growth potential in both e-commerce and cloud computing spheres, investors considering Amazon should weigh all factors carefully before diving in. The evolving landscape of tech giants like Amazon, Alphabet, and Microsoft suggest that strategic decisions in the market are paramount.
