AMZN: Acceleration In Cloud And AI Will Drive Margin Expansion Ahead

Key Takeaways

• AWS's leadership in cloud and AI, along with deep integration and enterprise relationships, positions Amazon for strong high-margin growth as digital adoption accelerates.
  
• Enhanced logistics automation, international expansion, and a growing Prime ecosystem drive structural cost efficiency, improved margins, and sustained revenue growth.
  
• Competitive, regulatory, and cost pressures across AWS and core retail risk squeezing margins and hindering Amazon's ability to sustain profitable, consistent long-term growth.

Catalysts

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

• Massive and still early-stage shift of global IT spend from on-premises to cloud, with management noting that 85–90% of worldwide IT expenditure remains outside the cloud and that this dynamic is poised to reverse over the next 10–15 years; AWS's broad functionality, leading security, and existing enterprise relationships position it to capture significant high-margin revenue growth as cloud and AI adoption accelerate.
  
• Rapid advances and adoption of generative AI, coupled with Amazon's deep vertical integration (custom silicon, proprietary models, tools for agent building/deployment), are fueling both incremental demand for AWS infrastructure and the rollout of new AI-powered features across retail and devices, creating operating leverage and supporting potential future margin expansion in high-growth segments.
  
• Ongoing optimization of Amazon's logistics and fulfillment operations-including further automation, robotics, and inventory placement enhancements-is driving structural cost reduction, faster delivery speeds, and improved customer experience, contributing directly to higher net margins and improved operating income in both North America and international markets.
  
• Continued international expansion, especially in emerging markets, with both improving operational efficiency and growing Prime member base, is driving scalable revenue growth and contributing to margin uplift as these regions reach profitability, supporting long-term consolidated margin and EPS growth.
  
• Strengthening Prime ecosystem and marketplace flywheel (content, exclusive live sports, product selection, increasing Prime sign-ups, and new verticals like healthcare and Project Kuiper) are increasing recurring revenues, share of wallet, and customer retention, supporting durable top-line and premium margin growth over the long term.

Amazon.com Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Amazon.com's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 12.3% in 3 years time.
• Analysts expect earnings to reach $111.9 billion (and earnings per share of $10.14) by about September 2028, up from $70.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $70.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.4x on those 2028 earnings, down from 36.0x today. This future PE is greater than the current PE for the US Multiline Retail industry at 21.6x.
• Analysts expect the number of shares outstanding to grow by 1.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.45%, as per the Simply Wall St company report.

Amazon.com Future Earnings Per Share Growth

Risks

• Persistent supply chain risks and uncertainty surrounding tariffs-especially those tied to China-could lead to higher costs for Amazon and its third-party sellers in the medium to long term; if these costs are absorbed or cannot be passed onto customers, this would pressure operating margins and possibly constrain revenue growth.
  
• AWS, Amazon's main earnings driver, is experiencing both increased capital intensity (notably in custom chips and data centers) and growing competition, with challenges around supply constraints (e.g., power and semiconductors), and the need for massive ongoing investment-these factors risk compressing AWS's segment margins and limiting overall earnings growth if AWS fails to keep pace with rivals technologically or commercially.
  
• Intensifying regulatory scrutiny (implied through references to legal risks, compliance, and SEC filings) and potential changes in global trade, data protection, and technology policy could raise compliance costs, limit Amazon's ability to scale certain businesses, and negatively affect profitability and revenue consistency.
  
• Saturation and slower e-commerce growth in Amazon's core markets, particularly in mature geographies (e.g., U.S., U.K., Germany, Japan), could constrain long-term topline retail revenue growth and create greater dependence on more volatile or lower-margin international and emerging segment expansion.
  
• Cost escalation risks from higher labor costs, logistics infrastructure investment, and the arms race in automation and AI (robotics, next-generation Alexa, Project Kuiper, etc.)-if not met with proportional efficiency gains or profitable monetization-could result in net margin compression and weaker earnings leverage over the long run.

Valuation

• The analysts have a consensus price target of $263.18 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 $225.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $905.9 billion, earnings will come to $111.9 billion, and it would be trading on a PE ratio of 33.4x, assuming you use a discount rate of 8.4%.
• Given the current share price of $238.24, the analyst price target of $263.18 is 9.5% 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.