Advanced AI And Automation Will Strengthen Future Profitability Across Retail And Cloud Services

Key Takeaways

• Amazon's investment in fulfillment automation and AI-driven AWS indicates potential for increased revenue, operating margins, and profitability.
  
• Strong growth in the advertising segment and enhancements in generative AI could significantly boost overall margin expansion and future earnings.
  
• Strain on Amazon's operating margins and revenue growth potential due to significant capital expenditure, foreign exchange fluctuations, and dependencies in AWS and logistics.

Catalysts

Engages in the retail sale of consumer products, advertising, and subscriptions service through online and physical stores in North America and internationally.

• Amazon is significantly expanding its same-day delivery network and fulfillment automation efforts, which should continue to drive both increased customer satisfaction and cost efficiencies, potentially increasing revenue and operating margins.
  
• The rapid growth and investment in Amazon Web Services (AWS), particularly in AI-driven technologies and custom AI silicon, indicate strong future earnings potential as enterprise adoption increases, impacting AWS revenue positively.
  
• Amazon's advertising segment, which surpassed a $69 billion annual revenue run rate, is expected to continue its strong growth trajectory, contributing to higher overall margin expansion due to its lucrative profit margins.
  
• The company's focus on reducing the global cost to serve through improved inventory placement and advanced robotics implies potential for further reductions in operating expenses, enhancing net margins and improving overall profitability.
  
• Further innovation in generative AI and applications across both retail and AWS is likely to unlock new revenue streams and operational efficiencies, contributing to improved earnings growth prospects for Amazon in the coming years.

Amazon.com Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Amazon.com's revenue will grow by 9.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.3% today to 12.3% in 3 years time.
• Analysts expect earnings to reach $104.0 billion (and earnings per share of $9.53) by about March 2028, up from $59.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $130.0 billion in earnings, and the most bearish expecting $84.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.2x on those 2028 earnings, up from 34.5x today. This future PE is greater than the current PE for the US Multiline Retail industry at 16.4x.
• Analysts expect the number of shares outstanding to grow by 1.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.21%, as per the Simply Wall St company report.

Amazon.com Future Earnings Per Share Growth

Risks

• Amazon faces foreign exchange rate fluctuations, which can negatively impact revenue when the dollar strengthens, as seen with a $700 million higher headwind than anticipated.
  
• The company's significant capital expenditure, particularly in AI for AWS, could strain operating margins in the short term, affecting overall profitability.
  
• Dependency on chip supply from third-party partners and power constraints may hinder AWS's ability to grow at its fullest potential, potentially affecting revenue growth rates.
  
• Restructuring of inbound logistics and expansion of robotics requires significant investment, and execution risks may affect cost efficiencies, impacting net margins.
  
• The potential decrease in AWS operating margins due to a new focus on generative AI, which involves heavy upfront investment, could impact overall earnings in the short term.

Valuation

• The analysts have a consensus price target of $265.238 for Amazon.com based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $306.0, and the most bearish reporting a price target of just $203.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $847.6 billion, earnings will come to $104.0 billion, and it would be trading on a PE ratio of 35.2x, assuming you use a discount rate of 7.2%.
• Given the current share price of $192.82, the analyst price target of $265.24 is 27.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.