Where Will Amazon Stock Be in 3 Years?
Key Points
Artificial intelligence and robotics could allow Amazon to dramatically cut costs over the coming years.
Investors are worried about the company's huge spending on data centers.
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Amazon (NASDAQ: AMZN) was a quintessential growth stock over the last few decades as it leveraged its e-commerce and cloud computing platforms to generate boatloads of shareholder value. That said, the company is already huge. And with a market cap of $2.25 trillion, some investors may fear that the low-hanging fruit has already been plucked.
These concerns are reasonable. Mature, blue chip companies usually don't report the same explosive top-line expansions as when they were scaling up. But Amazon can still reward shareholders. Let's dig deeper to see how this might play out over the next three years and beyond.
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A more mature Amazon
Since Amazon's CEO Andy Jassy took the helm from the company's founder Jeff Bezos in 2021, Amazon's stock value proposition has quickly shifted away from (often unprofitable) growth at all costs to a more measured expansion that focuses on streamlining operations and maximizing profitability. This push has involved several big changes.
On the e-commerce side, management has reworked the U.S. fulfillment network -- shifting away from centralized nationwide distribution to a network of eight largely self-sufficient hubs for different parts of the country. This system offers faster speeds and lower costs, rewarding both shareholders and consumers. Amazon also embarked on aggressive layoffs. Most recently, this involved axing 14,000 corporate positions in October to boost efficiency and reduce bureaucracy.
However, over the coming years, new technologies like generative artificial intelligence (AI) and warehouse robotics could change the game.
AI and robotics
Amazon is uniquely positioned to take advantage of the AI megatrend. On one hand, its cloud computing business, Amazon Web Services (AWS), is providing infrastructure like custom chips and data storage. On the other hand, the company is incorporating the burgeoning technology (alongside robots) into its own operations to boost efficiency and cut costs.
Last year, Amazon deployed the millionth robot to its warehouse in a sign of how quickly this transition is happening. And according to management, the entire delivery fleet will be powered by a new generative AI model called DeepFleet, which is expected to reduce travel times by 10%. But while automation promises to boost warehouse efficiency, that isn't the only reason why it is potentially so beneficial for the company.
Being a large low-wage employer (with 1.53 million staff members) comes with unwelcome reputational and political risk. Transitioning to a more autonomous warehouse model will reduce exposure to controversies while potentially shifting its labor force toward higher-skilled and higher-paying positions in robot management and maintenance.
Where will Amazon stock be in three years?
Amazon's focus on measured growth and cost-cutting is already having a noticeable impact on its results. Fourth-quarter revenue jumped 14% year over year to $213.4 billion, driven by strength in North American e-commerce and AWS, which is benefiting from AI infrastructure demand. Operating income increased roughly 18% to $25 billion in a sign that the recent cost-cutting and efficiency efforts are bearing fruit.
That said, Amazon's stock performance has been lackluster despite these positive trends. Shares are only up by 1.2% year to date, which is behind other retail options like Walmart, which has risen 16% this year.
The market may be nervous about Amazon's data center spending, which is expected to hit an eye-popping $200 billion in 2026. The company is rapidly accumulating GPUs, memory chips, and other types of compute hardware to stay ahead in the rapidly developing AI opportunity. But these capital expenditures soak up cash that could have otherwise been returned to investors as dividends or buybacks. And this may undermine the impacts of the recent cost-cutting and efficiency gains.
With a forward price-to-earnings (P/E) multiple of 26, Amazon stock looks reasonably valued. And it has a good chance of beating the market over the next three years. That said, the risks could soon outweigh the potential rewards if data center spending continues to increase.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool has a disclosure policy.
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