Investors have big questions about Amazon’s long-term earnings potential.
Amazon’s (AMZN 0.04%) business has changed dramatically in recent years. The e-commerce giant has more than doubled its delivery infrastructure, expanded its cloud services division and boosted profitability since 2021. As a result of these successes, the company’s stock price reached an all-time high with a valuation of $2 trillion as of mid-October.
It remains to be seen how so much good news will come to shareholders over the next few years. But Amazon still has a long way to go to grow and expand its profits. With this positive fact in mind, let’s take a look at the factors that could drive Amazon stock returns in the medium term.
E-commerce and cloud services
Much of the recent enthusiasm for the stock can be tied to Amazon’s success with its Amazon Web Services (AWS) platform, which underpins much of its revenue. Businesses slowed the pace of new spending on cloud services in 2022, but are now back to aggressively moving work to the cloud. This is good news for AWS, which nearly doubled its revenue in the first half of 2024. Operating income soared to $19 billion year over year.
This segment will be volatile in the coming years. This is to be expected if your business relies on broad IT spending trends. However, the stock should rise as AWS’s services platform continues to compete with rivals such as Microsoft and its Azure platform.
Meanwhile, the e-commerce sector is expected to contribute even more to annual revenue by 2027. Amazon has added hundreds of fulfillment and distribution centers since 2020 to meet the growing demand for e-commerce. Even if sales volumes continue to grow, there is no need to repeat these intense spending levels in the coming years. In other words, Amazon could finally start generating big profits from its retail division.
Indeed, thanks to the rapid growth of AWS, e-commerce businesses will have a smaller impact on revenue by 2027. However, the retail division still de-risks Amazon’s business and provides the company with a huge platform to launch products and services.
Will future profit margins be even higher?
The biggest question going forward is how far Amazon can continue to allow its profit margins to expand without giving up on growth investments. Over the past year or so, spending on AWS has not been able to offset the slowdown in capital spending on the retail side. As a result, the company, which has barely broken even on this metric for decades, is now on the verge of generating double-digit operating profits.
AMZN Operating Margin (TTM) data by YCharts.
Assuming IT spending continues, there’s a good chance profitability will continue to rise towards 15% of sales over the next few years. In this optimistic scenario, Amazon shareholders could potentially outperform the market, even given the company’s current market capitalization of $2 trillion.
Meanwhile, shrinking technology budgets could push Amazon’s profit margins back to low single digits, at least temporarily. The company could also find other large-scale growth efforts that don’t bear fruit for years. Such a scenario would mean lower returns for this tech stock.
But the best news for investors is that Amazon has enough cash flow to weather the downturn. And that core growth market will benefit for many more years to come. E-commerce now accounts for just 16% of all retail, compared to less than 1% when Amazon went public in 1997. So even periods of below-average returns don’t shake investors’ long-term confidence in the business.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Demitri Kalogeropoulos has a position at Amazon. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
