The tech giant has become a profit machine — and that won’t change anytime soon.
If the last few years have anything to teach us, it’s to never bet against America’s big tech. With shares up 104% over the previous five years, Amazon (AMZN -1.21%) has navigated both the COVID-19 pandemic and the 2022 inflation crisis while keeping shareholder value intact (although it was a bumpy ride). Let’s explore what the next half-decade could have in store for the diversified technology conglomerate.
Reinforcing the foundation
While Amazon has successfully diversified itself into businesses ranging from cloud computing to artificial intelligence (AI), its foundation remains e-commerce. In 2022, this sprawling segment had begun to underperform because of COVID-era overexpansion and high inflation, which squeezed consumer purchasing power. But now, those challenges are in the past.
Amazon’s first-quarter net sales rose 13% year over year to $143.3 billion. But more importantly, its operating income surged more than threefold from $4.8 billion to $15.3 billion over the same time frame.
This transformation was partially driven by significant cost savings in North American e-commerce (where management increased operating income by 455% to $4.98 billion) and international e-commerce (where they swung from a loss of $1.25 billion to a gain of $903 million). Amazon’s new decentralized fulfillment network and layoffs are transforming its bottom line, allowing it to focus on exciting new growth drivers.
Pivoting to new growth drivers
Amazon’s cloud computing division, Amazon Web Services (AWS), will be the key to its future growth. Like with e-commerce, management has targeted significant layoffs here. And it has paid off, with operating profits jumping 84% to $9.4 billion.
Over the next five years, investors can expect this segment to enjoy continued growth as it benefits from increased AI-related demand — particularly from start-ups like Anthropic, which uses its industry-leading cloud platform for storage and data management.
Amazon boasts its own custom AI training chips (Inferentia and Trainium), designed to attract clients to AWS’s cloud services by offering competitive training speeds at potentially lower costs.
Image source: Getty Images.
But growth plans aren’t limited to AWS. According to the Financial Times, management aims to develop a new retail channel to ship goods to American shippers directly from warehouses in China. Delivery times will be significantly longer than Amazon’s typical one-to-two-day waits but will involve significant cost savings for consumers.
Unlike AWS, this new retail channel probably won’t generate high-margin growth. However, it could help Amazon protect its market share from low-cost Chinese rivals like Temu (a subsidiary of PDD Holdings) or Shein.
Is Amazon stock still a buy?
Long-term investors should always consider valuation when picking a stock because this data shows how much of your buy thesis has already been priced in by other market participants. For Amazon, a forward price-to-earnings (P/E) multiple of 43 means its shares are valued slightly higher than the Nasdaq-100 average of 31.
This looks like a fair premium to pay, considering the company’s bottom-line momentum and new growth opportunities in AI technology. The stock looks likely to continue outperforming over the next five years. And it’s not too late to buy.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.