Where Will Amazon Be in 5 Years?

Amazon (NASDAQ: AMZN) became a tech giant thanks to its e-commerce business, one that is a leader around the globe. And that unit continues to play a key role in the Amazon story. But in recent years, another business has become the company's major profit driver -- and its growth might be just beginning.

I'm talking about Amazon Web Services (AWS), Amazon's cloud computing arm. It is the No. 1 cloud provider worldwide and has seen revenue skyrocket amid the artificial intelligence (AI) revolution. Importantly, revenue from core non-AI services remains strong, and over the past few quarters, a new revenue driver has emerged. This is the custom chips business.

With these exciting businesses booming, where will Amazon be in five years? Let's find out.

Image source: Getty Images.

Amazon's retail business drives revenue

As mentioned, Amazon started out as an e-commerce company, and today this retail business still drives revenue. For example, in the latest quarter, retail in the U.S. and internationally made up 77% of Amazon's $201 billion in total sales. AWS has seen its part of this picture take off in recent years, and in the quarter, it reached a $184 billion annualized revenue run rate.

Companies are rushing to AWS to fulfill their AI needs, from chips to large language models and even a fully managed system called Amazon Bedrock. Customers may access chips from leaders such as Nvidia, but they also may go for chips that Amazon has designed in-house. This is through Amazon's custom chips business, including the popular Graviton and Trainium chips. Graviton is a central processing unit (CPU), a type of chip found in all computers, while Trainium is designed specifically for AI.

And here, the news is specifically bright. Demand for Amazon's in-house chips is soaring, with revenue commitments for Graviton and Trainium increasing 20-fold in the third quarter compared with the year-earlier period. And revenue growth for this chips business continues to climb in the triple digits.

All of this is leading to another potentially big revenue opportunity for Amazon: the launch of its own stand-alone chips business. Today, these chips are available through AWS, but customers are asking Amazon to make them available beyond AWS as well. Amazon said it expects to do so, with Trainium, later next year.

Customers are saving billions thanks to Amazon's chips

This could offer Amazon a fresh revenue driver and a key to growth, as its chips have clearly proven themselves, and demand for chips should remain strong, as they are needed for agentic AI -- the next big growth area in the space.

Amazon developed its own chips to offer customers quality at a reasonable cost: The company says customers saved more than $2 billion in the recent quarter just by using its custom chips. And even as the company launches new generations of these chips, demand for earlier versions continues to march higher.

Now, let's consider where Amazon may be in five years. Amazon doesn't always break out figures for every aspect of its business, but we know that the custom chip business reached an annual revenue run rate of more than $25 billion in the second quarter. Overall, we know that demand for AI and non-AI services is soaring at AWS, so much that Amazon chief Andy Jassy predicts AWS will become a trillion-dollar revenue business within five to 10 years.

So, with such a prediction, supported by current demand and potential AI growth ahead, Amazon's annual revenue, from $716 billion last year, is very likely to surpass $1 trillion five years from now.

It's true that, in the meantime, the AI build-out is costly and might continue to weigh on free cash flow. This could create pressure on Amazon's stock price, as some investors may not like to see this pattern. We've already seen this, with Amazon's stock falling 15% since the start of August. But it's important to focus on the long term, and the AI opportunity is one that Amazon can't pass up.

AI has already helped the company lift revenue, and as Amazon's newest data centers come online over the next few years, the company should be able to start monetizing them. At the same time, the stand-alone chips business also may offer an important boost.

All of this means that, five years from now, Amazon may reap increasingly large rewards from its AI investments -- and that's terrific news for shareholders.

Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.