Amazon (AMZN +1.25%) stock is down almost 5% over the past three years despite sales increases, new products and services, and the power of Amazon Web Services (AWS). That's been changing this year, and the stock is up 40% so far in 2023. The market doesn't usually let itself miss a wide-open opportunity for too long, and it's finally catching on to Amazon's wealth of sales and income potential, even if it's feeling pressure from the economy today.
The market is far from perfect, but when it's working well, it prices stocks in relation to the future, not the past. Amazon stock is rising because investors see the long runway ahead. Where will it be in three years?
Bigger
Amazon is still the second-largest U.S. company by sales; first place still belongs to Walmart. But although its sales growth has been slowing, it's still impressive given recent economic volatility, and it's increasing faster than Walmart's. That suggests that in three years, Amazon could be the biggest U.S. company by sales.
Let's model some scenarios to see how it could play out. With the most recent full-year revenue growth, which is 9% for Amazon and 6.7% for Walmart, this is where they would be in three years.
| Company | TTM Revenue | Year 1 | Year 2 | Year 3 |
|---|---|---|---|---|
| Amazon | $524.9 billion | $572.1 billion | $623.6 billion | $679.8 billion |
| Walmart | $611.3 billion | $652.3 billion | $696 billion | $742.6 billion |
Data source: Amazon and Walmart quarterly reports. TTM = trailing 12 months.
If things continue this way, Amazon still won't catch Walmart. But it will be a much bigger company, with a smaller spread between the two. Analysts expect $633 billion in sales for Walmart in fiscal 2024, its current fiscal year, and $560 billion for Amazon.
Using their own projections for this coming year, let's try another scenario.
| Company | TTM Revenue | Year 1 | Year 2 | Year 3 |
|---|---|---|---|---|
| Amazon | $524.9 billion | $556.4 billion | $590 billion | $625 billion |
| Walmart | $611.3 billion | $628 billion | $644.7 billion | $662.2 billion |
Data source: Amazon and Walmart quarterly reports. TTM = trailing 12 months.
It doesn't look likely, the way things are going now, that Amazon will displace Walmart. But if Amazon gets back to its historical double-digit growth, that possibility is still open.
More profitable
Amazon is usually incredibly profitable, but it posted its first annual loss in a decade in 2022.
| Metric | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|
| Earnings per share (EPS) | $(0.27) | $65 | $42 | $23 |
Data source: Amazon quarterly reports.
Much has been said about Amazon's struggles this past year with inflation and dismantling some of the infrastructure it built out to meet skyrocketing demand under lockdowns, which hurt profitability. Not to downplay that, but it took a $12.7 billion pre-tax loss from its investment in Rivian Automotive after receiving a pre-tax gain of $11.8 billion for the same investment in 2021. Without that, EPS would have been lower than last year, but not negative.
Amazon has made great strides in becoming more efficient and boosting profitability. Having made layoffs in its massive workforce, upgraded technology to be faster and cheaper, and closed down unnecessary warehouses, it's already seeing improvements. First-quarter operating income came in slightly above the midpoint of guidance at $2.7 billion, compared with $3.7 billion last year.
Much of its recent operating income has been from AWS. Even AWS' operating income is starting to contract, and management expects it to further contract further. But it's confident in its strategy of providing the best service for its clients, even if it means helping them downgrade to cheaper plans while under pressure.
More dominant
Amazon has a history of acquiring companies and dominating industries. Innovation and takeovers are in its culture, and it often manages to operate businesses better and more cheaply than rivals. Sometimes its risky plays fail, but when they succeed, Amazontends to dominate the competition. That's been true from the very beginning, when the company moved from being a bookseller into all sorts of e-commerce, very often facilitated by its acquisitions of other e-commerce companies.
It recently bolstered its streaming efforts though its acquisition last year of MGM Studios, maintaining its position as a competitive player in streaming.
It's taking a bigger and bolder initiative in healthcare through its acquisition of One Medical, which closed in February. Amazon can identify gaps in the healthcare industry and offer its creative, disruptive energy to fill those gaps.
NASDAQ: AMZN
Key Data Points
Where will its stock be?
No one can predict any kind of stock movement with certainty. Three years ago, I don't think anyone would have predicted that today, Amazon stock would be below where it was then.
However, given current lows and Amazon's efforts to improve efficiency and generate higher sales, I would venture that in three years, the stock could be way ahead of where it is today. We're still in a bear market, and a recession could be coming. If we're back in a bull market three years from now, expect Amazon stock to be soaring.
