Amazon (AMZN -2.03%) has underperformed the broader market over the past five years. Over this period, the company has dealt with a CEO change (which was technically slightly over five years ago), a rare net loss, macroeconomic headwinds, increased competition in the cloud computing industry, and several other challenges. That said, there is still a lot to like about the company's business, and, in my view, the e-commerce specialist is likely to outperform broader equities over the next five years. Here's how much the stock could be worth by 2031.
Image source: The Motley Fool.
Key profit drivers
Amazon is investing heavily in its artificial intelligence (AI) ambitions. The company is now expecting $220 billion in capex this year. The tech leader is already seeing the results from these efforts. In the second quarter, Amazon's revenue increased by 20% year over year to $200.6 billion. The company's cloud computing segment, Amazon Web Services (AWS), posted $42.2 billion in net sales, up 37% year over year.
Amazon said that was the segment's fastest growth rate in 18 quarters. AWS accounts for most of Amazon's operating profits. Second quarter operating income jumped 43% to $27.5 billion. AWS's operating income was $16.6 billion, up almost 63% compared to the year-ago period. The company's net earnings per share (EPS) were $5.75, up from $1.68 reported in the year-ago quarter, although that figure included the positive impact of equity investments.
Over the next few years, several things will pull Amazon's EPS growth in opposite directions. Analysts actually expect the company's EPS to decline in 2027 compared to this year. Why? Largely because of its significant capex. Amazon's current expensive AWS investments and AI build-out are front-loaded, but the initial investment in data centers can generate significant revenue for years after. Amazon isn't blindly investing money either.
As the company has argued, it is currently capacity-constrained. It needs more investment to meet the demand for its cloud and AI products and services. That means that even if EPS falls next year, it could grow at a good clip from 2028 to the early 2030s, as Amazon more than recoups its investments. Several other factors could improve the company's profits and margins. Consider that Amazon is increasingly relying on internally developed AI chips.
That's much cheaper than buying from external providers. Amazon has also said that its Trainium franchise can beat comparable GPUs (Graphics Processing Units) in price-performance and should help AWS improve margins. What's more, Amazon could, eventually, start selling its Trainium chips to external customers, another potential growth avenue. But what about the company's other segments?
E-commerce still generates most of its sales, and that won't change in the next five years. Amazon could see improved profits and margins in e-commerce too, as it increasingly relies on AI to cut costs and boost engagement and gross merchandise volume. Don't expect significant gains within this unit. But at Amazon's scale, even minor improvements could have a meaningful impact on the entire business.
NASDAQ: AMZN
Key Data Points
Amazon's stock price in five years
Amazon's shares are currently trading at about $261 apiece. The company's forward price-to-earnings ratio is 21.8, compared to an average of 23.8 for consumer discretionary stocks. That valuation seems more than fair for a company of Amazon's stature that is posting strong financial results and boasts several important avenues for growth. Let's assume Amazon's earnings grow at a compound annual rate of 12% through the next five years, while its forward P/E stays constant throughout this period. The stock will be worth about $460 by the end of our period.
That's a healthy 12% annualized return. Can Amazon actually pull that off? It all depends on our assumptions, including the 12% average earnings grow. That would require Amazon's net income to jump significantly in 2028 and to maintain a healthy pace through 2031, given it will likely decline next year. But as we have seen, the company's investments could help it meet the demand for services in its most important segment, AWS, while the cloud computing giant continues to seek productivity gains through relying more on custom AI chips.
What about assuming that the market will price Amazon's future earnings at similar levels in five years? If the company can show that its AI build-out is justified, which it could do over the next few years -- provided AWS sales growth remains healthy -- this assumption may also prove reasonable.
Of course, this estimate may turn out to be wrong in either direction. But a bullish outlook for Amazon's medium term seems justified given recent financial results and the general trajectory of the cloud computing and AI industries. So, I'd advise investors to purchase the company's shares and hold onto them through 2031.
