Optimized Fulfillment And AI Services Will Improve Operational Efficiency

Key Takeaways

• Efficiency in Amazon's fulfillment network and supply chain diversification are enhancing cost-effectiveness and margin stability.
  
• Expansion in AWS and advertising services, supported by advancements in AI, promises significant future revenue growth.
  
• Significant investments and market pressures could challenge Amazon's future earnings, with risks from tariffs, infrastructure costs, competition, and expansion initiatives.

Catalysts

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

• Amazon's continued focus on making its fulfillment network more efficient and cost-effective, with regionalization and improved inbound architecture, is expected to reduce delivery costs and improve net margins.
  
• The expansion of Amazon's advertising services, leveraging its broad audience reach across multiple platforms, is set to drive future revenue growth as brands continue to increase spending on these channels.
  
• Growth in AWS, particularly through both generative AI and traditional cloud services, suggests significant future revenue potential, given that the majority of global IT spending is still on-premises—a scenario that Amazon expects will shift towards the cloud over the next decade.
  
• Amazon’s investment in AI, including the rollout of its custom AI chip Trainium2 and expanded AI services like Amazon Bedrock, positions the company to drive future earnings as these services are adopted more broadly and AI inference costs decrease.
  
• Strategic diversification of production across multiple countries, reducing reliance on singular markets like China, provides a more stable cost structure and supply chain resilience, positively impacting net margins and operating income amidst global trade uncertainties.

Amazon.com Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Amazon.com's revenue will grow by 9.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.1% today to 12.1% in 3 years time.
• Analysts expect earnings to reach $103.6 billion (and earnings per share of $9.33) by about May 2028, up from $65.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $82.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.3x on those 2028 earnings, up from 29.8x today. This future PE is greater than the current PE for the US Multiline Retail industry at 15.8x.
• Analysts expect the number of shares outstanding to grow by 2.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.46%, as per the Simply Wall St company report.

Amazon.com Future Earnings Per Share Growth

Risks

• The impact of tariffs and potential new trade policies is unknown, which could affect Amazon's pricing strategy and lead to higher costs, impacting net margins and profitability.
  
• There is a risk associated with the significant investments in infrastructure and AI, including AWS growth and expenses related to new technologies, which could put pressure on future earnings if demand does not meet expectations.
  
• Intensified competition in the cloud services market and AI projects could lead to pricing pressure and reduced market share, potentially affecting AWS's revenue growth.
  
• Foreign exchange fluctuations pose an unpredictable financial risk, which could affect revenue conversion and reported earnings.
  
• High investment and operational expenditures for expansion efforts such as launching satellites and Alexa+ initiative may not yield immediate returns, impacting short-term earnings and cash flow.

Valuation

• The analysts have a consensus price target of $239.326 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 $288.0, and the most bearish reporting a price target of just $195.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $856.2 billion, earnings will come to $103.6 billion, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $185.01, the analyst price target of $239.33 is 22.7% 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.