Amazon (AMZN) has a market capitalization of $2.3 trillion, but its share price has risen only 44% over the past five years. This performance places the e-commerce and cloud-computing giant among the underperformers of the “Magnificent Seven” tech stocks, trailing the S&P 500’s increase of roughly 80% during the same period. Only Microsoft has fared similarly poorly, with a share-price gain of about 78%. In stark contrast, Nvidia has seen its stock skyrocket by 1,330% thanks to its dominant position in advanced graphics processing units (GPUs), which are pivotal for artificial intelligence (AI) applications.
The recent surge in AI has significantly impacted the financial performance of many leading tech companies, yet Amazon’s relative underperformance stands out in this context. However, analysts suggest there are compelling reasons to consider Amazon’s stock as a candidate for substantial growth in the coming years.
AI’s Potential Impact on Amazon
By 2025, Amazon is projected to generate sales of $716.9 billion, positioning it as the world’s largest company by revenue, surpassing Walmart. While Amazon’s profit margins exceed those of Walmart, its net income generation is considerably lower than that of its peers in the Magnificent Seven. This discrepancy primarily arises because Amazon’s revenue is heavily reliant on its e-commerce business, which is known for its high operational costs.
The company’s Amazon Web Services (AWS), however, offers a different picture. Although it accounted for only 18% of Amazon’s total revenue last year, it contributed a remarkable $45.6 billion to the company’s overall operating income of $80 billion. As demand for AI grows, AWS has already experienced a boost in sales, which is expected to continue fueling earnings growth. Yet, there is optimism that Amazon’s e-commerce segment could also see improved margins due to advancements in AI and robotics.
By adopting warehouse automation technologies and exploring autonomous delivery methods, Amazon stands to reduce its operational expenses significantly. The company’s vast sales base allows it to leverage economies of scale, creating the potential for substantial earnings growth alongside cost reductions. Although it is unlikely that the e-commerce segment will achieve margins similar to those of AWS, meaningful improvements are anticipated in the next five years, thanks to AI.
Currently, Amazon is investing heavily in the necessary infrastructure to realize these enhancements. Should these margin improvements materialize as expected, it could trigger a reevaluation by the market, potentially propelling Amazon toward a $4 trillion market cap.
Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Microsoft, Nvidia, and Walmart. The Motley Fool has a disclosure policy.
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