No one knows the future, so picking stocks based on predictions is not a good investment. However, investors can use current company data to gain some insight into a stock and make an educated guess as to where the company (and stock) will end up in the long term.
Amazon (AMZN 3.52%) A company is currently in transition because of cost cutting and Artificial Intelligence (AI) It is starting to show in its operational results. Let’s discuss how these forces could impact Amazon’s stock over the next three years and beyond, and see if we can make educated guesses about the e-commerce giant’s future.
E-commerce segment can become more profitable
The pandemic was like a supercharger for e-commerce and stay-at-home activities in general. But it may also have marked the end of an era of massive growth for Amazon’s e-commerce operations. Under Andy Jassy, who will take the helm in 2021, Amazon has broken away from Jeff Bezos’ aggressive expansion strategy to focus on cost cutting and profitability.
Since last fall, Amazon has laid off 27,000 employees across all its divisions. The company has also reduced and optimized its less profitable business activities Distribution and fulfillment network. So far, the new policy is showing the expected results.
Second-quarter operating income rose 132% year-over-year to $7.7 billion, driven by major cost savings in the North American e-commerce segment. In the coming years, investors should expect e-commerce to become more of a cash cow than a growth driver as the company leverages its industry-leading scale and Network effects To maintain a moat against rivals.
Management may also implement its aggressive cost-cutting strategy in the international e-commerce division, further boosting Amazon’s profitability.
Artificial intelligence can supercharge AWS growth
According to CEO Andy Jassy, AI is “one of the biggest technological transformations of our lifetime.” And with some analysts expecting the total opportunity to reach $2 trillion by 2030, it will play a big 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 Web Services (AWS), Amazon’s cloud computing platform. It provides tools and computing power to these businesses when they bring in their own custom data, saving them the cost and complexity of building their own training infrastructure from scratch.
In the coming years, AI-related demand will likely represent an increasing percentage of AWS revenue, adding to the segment’s jump-start growth and greater diversification. The company will also invest in other opportunities, such as digital advertising, which generated $10.68 billion in revenue in the second quarter, a 22% year-over-year growth rate.
Amazon may increase its premium valuation
Stock valuations often involve significant expectations of a company’s future performance. After a rocket-ship rally of 61% year-to-date, shares have become very expensive. Next Price-to-earnings (P/E) multiple is significantly greater than 42 S&P 500 25 on average.
With that said, over the next three years, investors should expect Amazon to increase its premium valuation as cost-cutting and AI-driven growth lead to sustainable bottom-line improvements. It’s not too late to buy stocks.
John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of Amazon subsidiary, The Motley Fool. Will Ebifung does not have a position in any of the stocks mentioned. The Motley Fool recommends Amazon.com. Motley Fool has a disclosure policy.