Investors have big questions about Amazon’s long-term earnings potential.
Amazon‘s (AMZN 0.04%) business has changed dramatically in the past few years. The e-commerce giant has more than doubled its shipping infrastructure since 2021, expanded its cloud services division, and boosted profitability. Those successes helped push the stock to all-time highs at a valuation of $2 trillion as of mid-October.
It’s hard to see how the next several years could bring as much good news to shareholders. But Amazon still has a long runway ahead for both growth and profit expansion. With that positive fact in mind, let’s look into the factors likely to drive Amazon’s stock returns over the medium term.
E-commerce and cloud services
Most of the recent enthusiasm around the stock can be tied to Amazon’s success in the Amazon Web Services (AWS) platform that powers most of its earnings. Companies slowed their pace of new spending commitments on cloud services in 2022, but they’re now back to aggressively moving work onto the cloud. That’s great news for AWS, which nearly doubled its earnings in the first half of 2024. Operating income jumped to $19 billion, year over year.
This segment will be volatile over the next few years, which is to be expected when your business depends on broader IT spending trends. Yet the stock should see a lift from AWS as that services platform continues competing against rivals like Microsoft and its Azure platform.
Meanwhile, look for the e-commerce segment to contribute more toward annual earnings by 2027. Amazon added hundreds of fulfillment and distribution centers since 2020 to handle higher e-commerce demand. That intense spending level won’t need to be repeated in the next several years, even as sales volumes keep expanding. In other words, Amazon could finally start generating significant profits from its retailing segment.
Sure, the e-commerce business will likely matter less to the bottom line by 2027, thanks to faster growth in AWS. But the retailing segment still makes Amazon a less risky business and gives the company a huge platform from which it can launch products and services.
Higher margins ahead?
The biggest question going forward is to what extent Amazon can keep allowing profit margins to expand without shortchanging its growth investments. In the past year or so, spending in AWS hasn’t offset slower capital investments on the retailing side. As a result, the company is close to generating a double-digit operating profit after barely breaking even on this metric for decades.
AMZN Operating Margin (TTM) data by YCharts.
There’s a good chance that profitability will keep climbing toward 15% of sales in the next few years, assuming continued IT spending. That optimistic scenario could see Amazon shareholders accruing market-thumping returns, even from the company’s current $2 trillion market cap level.
On the other hand, shrinking tech budgets might send Amazon’s profit margin back down toward the low single digits, at least temporarily. The company might also find other large growth initiatives that won’t pay off for many years. These scenarios would mean weaker returns for this tech stock.
Yet the best news for investors is that Amazon has ample cash flow that can help see it through a downturn. And its core growth markets have many more years of gains ahead. E-commerce makes up just 16% of total retailing today, compared to less than 1% when Amazon went public in 1997. That’s why even a period of below-average returns shouldn’t shake investors’ long-term confidence in this business.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Demitri Kalogeropoulos has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.