Although Amazon (AMZN +3.47%) has been a fantastic business to have owned over the past two decades, in more recent times, this just hasn't been the case. Shares are up just 10% in the last three years (as of June 3).
This modest gain, which lags the Nasdaq Composite's return, doesn't take away from the fact that this e-commerce and cloud computing juggernaut is one of the most dominant enterprises on planet Earth. And that's why investors should still keep it on their radar.
Where might Amazon stock be three years from now?
Online shopping
It's a startling statistic, but about 38% of all online spending in the U.S. goes through Amazon.com. This is significantly higher than its second- and third-place rivals (Walmart and Apple, which have about 6% and 4%, respectively). That lead just goes to show you the stranglehold Amazon has in the e-commerce space.
I have zero doubt that this is still going to be the case in 2027. With its relentless focus on obsessing over the customer, Amazon provides shoppers with millions of items at low prices. And thanks to its sprawling logistics network, fast and free shipping is offered in a cost-effective way that only improves the consumer experience. It was recently reported that Amazon has already added 16 million square feet of warehouse space this year in an effort to bolster its delivery capabilities.
In the U.S., online shopping accounts for less than 16% of all retail spending. That share has climbed from 10% exactly five years ago. Assuming this slow-and-steady rise continues, this provides a nice secular tailwind for Amazon to capture more sales growth.
NASDAQ: AMZN
Key Data Points
Amazon's growth drivers
Amazon is arguably one of the most innovative companies out there. Despite being known mainly as an e-commerce business among the general public, there are other segments that will keep its expansion going at a brisk pace.
Many investors are familiar with Amazon Web Services (AWS), the company's industry-leading cloud computing division. AWS typically posts double-digit revenue growth. And in the most recent quarter (Q1 2024, ended March 31), it reported a superb 37.6% operating margin.
Investors should expect AWS (which accounted for 16% of revenue in 2023) to become a more important driver of sales and earnings in the future. The shift from on-site tech infrastructure to off-premises, coupled with many clients' desire to integrate artificial intelligence capabilities into their operations, provides AWS with a nice tailwind.
Then there's digital advertising, an area Amazon has found tremendous success in thanks to its popular online marketplace. Ads were introduced to the Prime Video streaming service in January, providing another valuable asset to monetize.
During the last quarter, digital ads resulted in $47.2 billion of annualized revenue. This scale puts it behind only Alphabet and Meta Platforms in terms of domestic market share.
Changes in valuation
It doesn't take a lot of convincing to get one to appreciate Amazon's operations. It dominates multiple industry verticals and has meaningful growth potential.
But investors need to consider valuation in their analysis before determining what to do with the stock. While Amazon hasn't been too great of an investment in the past three years, since the start of 2023, shares are up 112%. Consequently, the valuation isn't as attractive as it was about 12 months ago, when the stock traded at a price-to-sales (P/S) ratio of just 2.4.
Today, the P/S multiple sits at 3.2. That might seem expensive, but it's in line with the stock's trailing-10-year average. Given the potential for sizable revenue and income gains over the next three years, investors are likely to be rewarded if they add Amazon shares to their portfolio.
