Shares of Amazon (AMZN 0.86%) have climbed by just 42% in the past five years (as of Sept. 26), which significantly lags the broader market. However, this hasn't always been the case, as the company's shares have soared 738% and 10,320% in the past 10 and 20 years, respectively.
This high-quality company should be on the radar of every long-term investor. Where will this "Magnificent Seven" stock be in five years? It's important to first consider what the business will look like before thinking about where shares are possibly headed.
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The ongoing rise of AWS
One of the most powerful secular trends in the past decade has been the rise of cloud computing, as businesses transition their IT workloads from being on-premises to a flexible and more cost-effective solution. Amazon Web Services (AWS) has been leading the charge. It brought in $30.9 billion in revenue and $10.2 billion in operating income just in the second quarter (ended June 30).
CEO Andy Jassy believes there is a huge runway ahead. He says that more than 85% of IT spending is still on-site.
NASDAQ: AMZN
Key Data Points
In the past few years, companies across the board have been looking at artificial intelligence (AI) and trying to figure out ways to leverage this technology to become more efficient, more productive, and more focused on customers and end users. Here's where AWS comes into the picture again. The advent of AI provides even more sustainable demand because companies will need to use AWS tools to build their own AI applications.
In the second quarter, AWS represented 18% of the entire company's revenue and 53% of its operating income. Looking out five years from now, I would suspect that these two metrics will be higher. That's probably a safe assumption given the impressive trajectory that AWS has been on.
Don't forget about online shopping
When we look at what Amazon might be in the year 2030, it should be obvious that online shopping will remain a key part of the business. That's not a controversial perspective. It has dominated this niche in the overall retail sector, and that's not going to change anytime soon. In the U.S., nearly $4 of every $10 spent online happens on the Amazon marketplace.
And there is clearly more room to run. Even after the rise of e-commerce spending in the past couple of decades, physical retail still represents 84% of the entire sector in the U.S., according to data from the Federal Reserve Bank of St. Louis. Not all spending is moving online, but there's plenty of expansion potential.
Amazon will benefit, as it has in the past. It has a huge selection of items. And it has a robust logistics network that facilitates fast and free shipping, which provides consumers with a superior user experience. This setup is difficult to compete with.
Can Amazon stock beat the market?
In the most recent quarter, Amazon reported $167.7 billion in revenue. Even at this scale, investors can be confident that the business will keep growing at a healthy rate. In addition to AWS and online shopping, the company is also finding remarkable success in digital advertising, a segment whose sales were up 22% in the second quarter year over year. This will also be a profit driver in the years ahead.
Amazon shares underperformed the market in the past five years, but I believe the rest of this decade will prove to be much better. Overall revenue and earnings will be higher five years from now. That provides a nice tailwind for investors.
What's more, the valuation right now is very reasonable, in my view. Shares trade at a forward price-to-earnings ratio of 28.2. For such a dominant business that has its hands in various high-growth markets, Amazon is a smart bet to make for investors with a five-year time horizon.
