The best stock market returns accumulate over decades rather than quarters. That’s why billionaire investor Warren Buffett cites his longevity as a key supporting factor in his portfolio’s massive growth over the last several decades. “It helps to start early and live into your 90’s,” he told Berkshire Hathaway shareholders in this year’s annual report.
Growth-stock investors can seek to replicate some of his success by taking a much longer outlook on their investments. With that goal in mind, let’s look at Amazon‘s (AMZN 0.46%) prospects for success in the coming decade. Where will the business, and the stock, be by early 2034?
Services over products
E-commerce will always be a big part of Amazon’s business, but the future seems to be all about its services sales. That segment is anchored by the Amazon Web Services (AWS) platform and includes things like Prime subscriptions and advertising sales. Through the first three quarters of 2023, that unit clocked in at $226 billion, or 56% of sales, and was expanding at a much faster rate than the e-commerce segment.
It wouldn’t be a stretch to think that in a decade, Amazon’s business might look more like Microsoft‘s (MSFT -0.05%) does today. It will sell products, sure, but almost all its profits will come from cloud and software services.
This shift has a good shot at enhancing profitability and boosting cash flow, as investors have already seen in the last few quarters. Amazon likely won’t have Microsoft’s 40% profit margin by 2034 but should post much stronger results than its current 4% level. And positive stock returns will track along with those financial improvements.
Generating profits
If you don’t think artificial intelligence (AI) is a priority for Amazon, consider that the term “generative AI” showed up 18 times in its most recent earnings release. That tech is now deeply embedded in the AWS platform, which is already helping many of its biggest customers with their own AI projects.
Amazon is also using it to improve the shopping and selling experiences on its e-commerce store, for example by sifting through product reviews to highlight factors that previous buyers have frequently mentioned.
There’s no telling how AI will develop over the next decade, but it appears likely that Amazon will join other tech giants like Microsoft in leading the shift into this computing era. It’s also unclear right now what impact the technology will have on Amazon’s finances.
The early signs are encouraging, though. Generative AI is popular because it is creating more value across a wide range of business processes. That makes it probable that the technology will lift Amazon’s profit margins even as it helps accelerate sales growth in the next decade.
The price change
Amazon is currently valued more like a retailer than a software-as-a-service stock. Its price-to-sales (P/S) ratio of 3 is closer to eBay‘s P/S of 2 than it is to Microsoft’s ratio of 13 times annual sales.
Amazon should close that gap with Microsoft over time if it continues shifting its business toward services sales while capitalizing on the AI boom. Many factors — including a slowdown in spending on information technology, or a wider recession — could delay or even derail these ambitions.
But Amazon stock seems primed to generate solid returns for patient investors over the next several years.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Demitri Kalogeropoulos has positions in Amazon and Berkshire Hathaway. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, and Microsoft. The Motley Fool recommends eBay and recommends the following options: short January 2024 $45 calls on eBay. The Motley Fool has a disclosure policy.
