Shares have risen 23% since the beginning of the year. Amazon (NASDAQ:AMZN) has finally recovered from its post-pandemic slump. The recovery was based on streamlining its e-commerce business and focusing on exciting new growth drivers such as artificial intelligence (AI).
Let’s explore how this dynamic may evolve over the next three years.
A leaner and more efficient Amazon
While redundancies and cost-cutting may create a sense of anxiety among middle managers and other replaceable employees, but they can be good news for investors who want a leaner and more profitable company. For Amazon, these controversial efforts are producing big results.
The company’s revenue rose a modest 13% year over year to $143.3 billion in the first quarter, but operating income rose more than 200% to $15.3 billion. Many of those improvements came from unlocking efficiencies in North American and international e-commerce, which had previously suffered from weak margins due to pandemic-era overexpansion under Amazon’s former CEO Jeff Bezos.
The new CEO Andy Jassy has initiated a massive cost-cutting program. He is not only interested in short-term profits.
And Jassy is refocusing the company on what made it so successful in the first place: the customer experience. In the first quarter, Amazon achieved its fastest delivery speeds ever. Nearly 60 percent of Prime members’ orders arrived within two days in the country’s 60 largest metropolitan areas.
And in major international cities like London, Tokyo and Toronto, three out of four shipments arrived within two days.
Investors should not expect the huge e-commerce business to be a large Growth drivers in the next three years. But The The company can leverage its size and operational efficiency to maintain its dominant position, satisfy customers, and deliver reliable profits to investors.
Medium-term growth drivers
Over the next three years, the company’s prospects will depend on how well it Generative artificial intelligence (AI). The company has developed a picks and shovels-based business model that provides its Amazon Web Services (AWS) customers with the computing power and fundamental models to develop consumer-facing applications.
In the first quarter, AWS revenues rose 17% year over year to $25 billion. And the cloud computing segment continues to contribute an outsized share of Amazon’s operating profit: $9.4 billion of the $15.3 billion (63%) generated during the period.
New AI-related services such as Amazon Bedrock – which enables AWS customers to build consumer-facing AI applications using the foundational models provided – will drive further growth.
The company is also integrating AI into other aspects of its business, including customer service, image generation for ads and its Alexa virtual assistant, which it plans to update with AI features and relaunch this year for a monthly subscription fee. None of these efforts will do one large Effects alone, but they could create a flywheel effect in which many small successes complement each other and thus generate considerable momentum.
Is Amazon stock a buy?
With Price-earnings ratio (P/E) of 40, Amazon shares are more expensive than the Nasdaq 100 Average of 31, which is a large Premium cost for an established company that is no longer growing its business quickly.
Still, Amazon’s ongoing cost-cutting could lead to further profitability improvements even as e-commerce sales growth slows. The company’s cloud computing division, AWS, Also remains an exciting opportunity for high-margin expansion, and shares are therefore positioned to outperform the market over the next three years.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Ebiefung does not own any of the stocks mentioned. The Motley Fool owns a position in Amazon and recommends the company. The Motley Fool has a disclosure policy.
Where will Amazon stock be in 3 years? was originally published by The Motley Fool