Technology stocks have once again reached all-time highs. Where do we go from here?
The past few months have been pleasing to shareholders. Amazon (AMZN -1.54%). The stock is up 45% in the past six months and 22% year-to-date.
With a market capitalization of $1.93 trillion, the stock price comes as investors grow more optimistic about the profitability of the company’s e-commerce business and the regrowth of cloud computing driven by the recent artificial intelligence (AI) boom. recently surpassed the all-time high set in 2021.
Amazon’s stock price has increased 100% over the past five years. But what about the next five years? Can we repeat this great performance and double it again? Let’s take a look.
E-commerce profits are changing, and further growth is expected in the future
Even though the online store is approaching 30 years of operation, Amazon’s e-commerce and global retail operations are still growing rapidly. In 2023, North American sales increased 12% to $353 billion, and overseas sales increased 11% to $131.2 billion.
Although Amazon’s platform is extremely dominant in the e-commerce space, online shopping currently only accounts for an estimated 15.6% of U.S. retail sales. If this number increases consistently over the next 10-20 years and Amazon can maintain its market share, there are still many years left for sales to increase.
The best part about this growth in Amazon’s e-commerce division is where it’s coming from. Last quarter, third-party seller services grew 19% year-over-year, and advertising services grew 26%. If these high-margin segments continue to grow rapidly, overall profit margins could increase.
And that is exactly what we are seeing today. North American operating margin reached 6.1% in the fourth quarter of 2023, expanding in each of the past six quarters and reversing from -0.3% in the fourth quarter of 2022. In 2024, investors should expect e-commerce margins to continue to rise. .
Cloud computing rebound
The company’s most profitable division is its cloud computing division, Amazon Web Services (AWS). In 2023, sales were more than $90 billion, operating profit was more than $24.6 billion, and profit margin was 27.1%.
However, towards the end of 2022 and early 2023, there was significant concern about an AWS slowdown. Revenue growth slowed from 28% in Q3 2022 to 12% in Q2 2023 as the company helped software customers reduce costs since the height of the pandemic.
Today, these concerns have proven too pessimistic. AWS revenue accelerated to 13% growth in the fourth quarter, sending its stock price higher. Also, with the rapid increase in AI services, revenues in 2024 and 2025 look promising. These new products use large amounts of cloud computing to operate, and AWS aims to be one of the leaders in this space. alphabetGoogle Cloud and microsoft Azure. For example, the company has signed an extensive deal in this space with fast-growing startup Anthropic.
Analysts expect cloud computing to continue to grow at double-digit annual rates over the next decade or more. If Amazon can maintain its market share lead as it has in e-commerce, AWS should be able to grow for years to come.
AMZN data by YCharts.
What will Amazon’s stock price be like in 5 years?
To estimate the stock price five years from now, you need to estimate the earnings for both e-commerce and AWS. Let’s assume that e-commerce, excluding the unprofitable international division, can increase sales by 12% annually over the next five years and expand profit margins to 10%. That would put North American retail profits at $62 billion in 2028.
Similarly, assume that AWS grows at 12% over five years, with a profit margin of only 27%. In 2028, AWS profits will be worth $43 billion. Adding both numbers together, Amazon will generate $105 billion in revenue in 2028. This does not include profits from other sectors such as international e-commerce and satellite internet services.
Now comes the most difficult part. What earnings multiple will Amazon trade at in 2028? It’s impossible to give an exact answer, but its broad competitive advantages in both cloud computing and e-commerce make this stock a I think it deserves to trade at a multiple of 30 times market earnings, known as the price-to-earnings ratio (P/E).
Multiplying $105 billion by 30 gives a market cap of $3.15 trillion, a 66% increase from today’s price. Although not a doubling, Amazon still seems to have some upside for long-term shareholders.
Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Brett Schaefer has held positions at Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: His January 2026 $395 long call on Microsoft and his January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.
