This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
It's Amazon's (NASDAQ: AMZN) world, we're just living in it. At least, sometimes that's how it feels with how large the technology giant and e-commerce pioneer has gotten. Generating $638 billion in revenue last year, Amazon is now one of the largest companies in the world in terms of sales, and close to the top in terms of market capitalization.
Has the company reached its peak, or is the growth party still set to continue? Let's dive into the numbers and figure out where Amazon stock may trade five years from now.
Steady growth in e-commerce
Since its founding around 30 years ago, Amazon has become the dominant player within e-commerce in the United States. What has kept its platform steadily growing is that e-commerce's share of the total retail market has been consistently growing at the expense of in-person sales. This is what lifted Amazon's North American retail sales to $389 billion in 2024.
And yet, if we look at the data, e-commerce as a percentage of total U.S. retail sales still remains below 20%. Excluding a brief steep jump during the heart of the COVID-19 pandemic and then a decline back toward its previous curve as social distancing measures receded, this figure has steadily risen for years, going from under 1% in 2000 to 16.5% today. In-person retail will never disappear entirely. However, I think it is likely that e-commerce as a percentage of retail sales will be higher five years from now than today, which will be a tailwind for Amazon's platform.
Combine this with economic and consumer spending growth in North America and I think Amazon's retail division can grow revenue by at least 10% a year outside of recessionary periods. Even better, the company has now scaled some high-margin divisions that will provide even more profit potential at these larger and larger revenue figures. These include advertising across e-commerce listings and media, third-party seller services, and subscriptions, which combined now make up a larger percentage of Amazon's total revenue in the retail division.
Add everything together, and I think it is clear that Amazon's e-commerce division is poised to grow its earnings power over the next five years.
A huge AI opportunity?
Next, we need to consider the second pillar of Amazon's sprawling empire: cloud computing. Its Amazon Web Services (AWS) division pioneered the cloud model, allowing companies to easily outsource their data center, computing, and software needs. Today, AWS generates over $100 billion in annual revenue and is much more profitable than e-commerce, posting around $40 billion in operating income in 2024.
Now, the division's growth is being amped up by the rising use of artificial intelligence (AI) tools. New AI services like Anthropic are working with AWS because it can supply the processing power their new large language models require. More computational needs means more spending on AWS, which is accelerating its revenue growth. Exiting 2024, the unit's revenue was growing 19% year over year and hit $28.8 billion in Q4.
We are only in the first few years of this explosion in AI spending. There will likely be down periods for this market, but it is estimated that hundreds of billions of dollars -- and perhaps trillions over the long term -- will be spent on AI infrastructure. This presents a huge opportunity for the leader in cloud computing services, and should lead to fantastic earnings growth for AWS over the next five years.
AMZN Operating Margin (TTM) data by YCharts.
Where will Amazon stock be in five years?
As of this writing, Amazon has a market cap of around $2 trillion, making it the fourth-largest company in the world.
Based on the analysis in the above sections, I expect Amazon's revenue to grow by at least 10% a year for the next five years. Let's say its average annualized growth rate is 12% per year. From its 2024 revenue of $638 billion, it would reach $1.1 trillion in annual revenue in five years. That is a monstrous figure, but an achievable one considering how large its end markets are.
Last year, Amazon's operating margin was 10.75%. With higher-margin services such as AWS growing faster than overall sales, Amazon should be able to widen its profit margins over the next five years. I believe a 15% profit margin is reasonably achievable, but wouldn't be surprised if it ended up being higher.
A 15% profit margin on $1.1 trillion in revenue would give it $169 billion in annual earnings. If it stayed at its current stock price, that would bring Amazon's price-to-earnings ratio (P/E) down below 12. I think a high-quality business such as Amazon deserves to trade at a much higher multiple. Assuming the market agrees, Amazon stock will likely be trading at a higher level in five years. Not 10 times higher given the company's maturity, but the stock is still a buying opportunity for investors right now.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
