No one knows the future, so picking stocks based on predictions isn't good investing. However, investors can use a company's current data to gain some insight into a stock and make an educated guess about where the company (and the stock) could end up over the long term.
Amazon (AMZN 3.89%) as a company is in transition right now as factors like cost-cutting and artificial intelligence (AI) begin to show up in its operational results. Let's discuss how these forces could influence Amazon's stock over the next three years and beyond and see whether an educated guess can be made about this e-commerce giant's future.
The e-commerce segment could become more profitable
The pandemic was like a supercharger for e-commerce and stay-at-home activities in general. But it might have also marked the end of an era of outsized growth for Amazon's e-commerce operations. Under the leadership of Andy Jassy, who took the helm in 2021, Amazon has broken from Jeff Bezos' aggressive expansion strategy to focus on cost-cutting and profitability.
NASDAQ: AMZN
Key Data Points
Since last fall, Amazon laid off 27,000 employees across all its divisions. The company has also scaled down less profitable business ventures and optimized its distribution and fulfillment network. So far, the new strategy seems to be having the intended results.
Second-quarter operating income surged 132% year over year to $7.7 billion based on substantial cost savings in its North American e-commerce segment. Over the coming years, investors should expect e-commerce to become more of a cash cow than a growth driver as the company takes advantage of its industry-leading scale and network effects to maintain a moat against rivals.
Management might also implement its aggressive cost-cutting strategy in the international e-commerce segment, further boosting Amazon's profit potential.
Artificial intelligence could supercharge AWS growth
According to CEO Andy Jassy, AI is one of the "biggest technical transformations of our lifetimes." And with some analysts expecting the total opportunity to be worth $2 trillion by 2030, it will likely play an outsize role in Amazon's performance over the next few years.
The company is investing in the opportunity through Bedrock, a tech service designed to help its enterprise clients build generative AI applications on Amazon's cloud computing platform, Amazon Web Services (AWS). It provides these businesses with tools and computing power while they bring their own custom data, saving them the cost and complexity of building their own training infrastructure from scratch.
Image source: Getty Images.
Over the coming years, AI-related demand will probably represent an increasing percentage of AWS revenue, jump-starting growth in the segment and adding more diversification. The company will likely also invest in other opportunities, such as digital advertising, which brought in $10.68 billion in the second quarter, a growth rate of 22% year over year.
Amazon could grow into its premium valuation
Stock valuations often have significant expectations of a company's future performance priced in. And that dynamic is clearly happening with Amazon right now. After a rocket-ship rally of 61% year to date, shares have become quite pricey. The forward price-to-earnings (P/E) multiple of 42 is significantly more than the S&P 500 average of 25.
With that said, over the next three years, investors should expect Amazon to grow into its premium valuation as cost-cutting and AI-driven growth leads to sustainable bottom-line improvements. It isn't too late to buy the stock.
