What will happen to Amazon stock in 5 years?

Amazon initially benefited from the rapid increase in demand during the novel coronavirus infection (COVID-19) pandemic, but this led to a dramatic overexpansion of staff and fulfillment infrastructure. As private consumption slowed in 2022 and 2023, the company's profit margins and profits declined drastically.

Andy Jassie, Chief Executive Officer (CEO), who took office in 2021, had the main goal of streamlining Amazon through personnel reductions and operational efficiency improvements. So far, great results have been achieved.

Net sales for the first quarter increased slightly to $143.3 billion, but operating profit increased by approximately 220% to $15.3 billion, the first double-digit (10.7%) operating margin in the company's history.

Amazon streamlined its nationwide fulfillment network by focusing on more efficient regional hubs spread all over the country, and succeeded in reducing costs in particularly busy e-commerce businesses. Furthermore, it is shifting its focus to service-related businesses with high profit margins, such as Amazon Web Services (AWS) and digital advertising, and these will play an increasingly important role for the company over the next 5 years.

Over the next five years, Amazon's retail e-commerce business will likely transition to a mature dollar box, and new service-related ventures will be the next engine for growth. Generative artificial intelligence (AI) may be the most promising opportunity.

While reducing operating costs, Amazon is also strengthening capital investment in cloud-based AI projects such as Bedrock, which is a platform designed so that customers can train and execute large-scale language models within Amazon's AWS ecosystem. They are also developing unique custom chips called Trainium and Inferentia, designed to promote cost reduction on the AWS platform and reduce dependence on third-party suppliers such as Nvidia.

It is still unclear how large the global AI industry will be in the next few years. However, one analyst at New Street Research believes that AI-related workloads will account for 21% of Amazon's AWS revenue by 2025, and there is a possibility that they will expand at an average annual growth rate (CAGR) of 54% until 2027.

The expected price-earnings ratio (PER) of Amazon stock is 43 times, and when compared to about 30 times the NASDAQ 100 average, it is definitely not cheap, especially considering that the company is large and the sales growth rate is not that high. Nonetheless, Amazon's valuation seems reasonable because there is a compelling framework for improving profitability over the next few years.

New opportunities in AI infrastructure could lead to disproportionate growth in the AWS segment, which usually enjoys far higher profit margins than Amazon's core third-party market. And it seems like management's efforts to cut costs aren't over yet. According to Business Insider, the company is currently aiming to reduce the physical footprint of the office, and this will further worsen the cost efficiency obtained by previous personnel cuts.

Amazon stock continues to be a strong buying force in the long run, and it seems likely that it will perform better than the overall market over the next 5 years.