Source: PaxForex Premium Analytics Portal, Fundamental Insight
Amazon’s stock has seen a 12% rise over the past three years, recently surpassing its all-time high set in 2021. However, during this period, it has significantly underperformed the broader market. The S&P 500 has gained 34% in the same time frame, outpacing the e-commerce and cloud computing giant.
This marks one of the longest stretches of underperformance in Amazon's history. Despite this, the company’s underlying financials remain strong. Revenue continues to grow at a double-digit pace, and profit margins are improving. If these trends persist, the question arises: where could Amazon's stock stand three years from now?
Amazon's latest quarterly results revealed a 10% year-over-year revenue increase, reaching $148 billion. The company’s dominance in e-commerce across the US and other markets has made it one of the world’s largest revenue generators.
Additionally, Amazon Web Services (AWS), its cloud computing division, plays a crucial role in this success. AWS generates approximately $100 billion annually and reported 19% year-over-year sales growth last quarter.
Both divisions are well-positioned for future growth due to strong tailwinds. E-commerce currently represents about 16% of total US retail sales, and while not all transactions are shifting online, the upward trend has persisted for decades and shows no signs of slowing. As retail spending grows and e-commerce claims a larger share, Amazon stands to benefit significantly.
Similarly, cloud computing is a small percentage of overall IT spending. Industry analysts project the sector to grow by 19.4% annually from 2024 to 2028, providing yet another growth driver for Amazon.
Considering these factors, Amazon is positioned to increase its overall revenue by around 10% annually for the next three years, if not longer. This growth is complemented by expanding profit margins across its divisions. Over the past 12 months, Amazon’s operating margin has reached an all-time high of 9%.
Three key segments are driving this margin expansion. AWS, with its 30%-plus operating margins, is outpacing overall sales growth. The other two segments, third-party seller services (up 13% year-over-year) and advertising (up 20%), also boast higher profit margins compared to traditional e-commerce.
If these high-margin segments continue to grow faster than Amazon’s overall sales, the company’s operating margin will likely continue expanding in the coming years.
In addition to growth in these areas, Amazon has implemented workforce reductions across several divisions in 2023 and 2024, which is expected to contribute further to profit growth.
Amazon’s earnings growth is being fueled by both sales growth and margin expansion. Over the next three years, consolidated revenue is projected to grow by at least 10% annually, with profit margins potentially expanding to 15%, up from the current 9%.
With Amazon’s revenue for the last 12 months standing at $604 billion, compound annual growth of 10% would bring that figure to $804 billion by 2027. Applying a 15% profit margin to this estimate results in $120 billion in annual operating income, more than double the $50 billion generated over the last 12 months.
While predicting exact stock price movements is difficult, if Amazon can more than double its operating income as projected, shareholders can expect strong returns over the long term. As profitability continues to improve, Amazon’s stock price is likely to climb steadily over the remainder of this decade.
As long as the price is above 180.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 187.71
- Take Profit 1: 195.00
- Take Profit 2: 200.00
Alternative scenario:
If the level of 180.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 180.00
- Take Profit 1: 175.00
- Take Profit 2: 170.00
