Where will Amazon inventory be in 3 years?

With shares down nearly 20% over the past 30 days, Amazonhis (AMZN 0.69%) The AI-powered rally is starting to falter. There is also concern that a potential economic slowdown could affect its consumer-based business model. Let’s examine how these short-term challenges could affect stock performance over the next three years and beyond.

Recession fears are growing

It’s impossible to predict the future, but investors should pay attention to macroeconomic factors that could affect their thesis. For Amazon and other companies focused on consumer goods, the main near-term threat could be a recession, which many economists see as more likely after July’s unemployment rate (4.3%) was higher than expected .

When people lose their jobs, they have less money to spend on online shopping, which tends to discretionary items over needs. However, the good news is that Amazon customers are still looking strong.

Second quarter revenue up 10% year after year to $148 billion, driven by North American and international e-commerce expansion.

Both segments are relatively mature, so investors should not expect explosive growth in the future. However, Amazon has focused on profitability through workforce reductions and supply chain efficiencies, and those efforts are paying off. Operating income rose 59% to $5.1 billion for North America, while the international segment jumped from a loss of about $900 million to a gain of about $300 million.

New drivers of growth and profitability

While Amazon’s e-commerce business has transitioned into a stable cash cow, new segments will help fuel the next phase of long-term growth. After the launch of OpenAI’s ChatGPT in late 2022, generative artificial intelligence (AI)-related demand has boosted the company’s cloud computing segment, Amazon Web Services (AWS).

AWS focuses on the infrastructure side of the AI ​​opportunity, offering customers pre-built AI services such as Amazon Rekognition (which helps with image recognition and video analysis) or Amazon Macie, designed to use machine learning to protect sensitive data customers.

Amazon also boasts a foundation large language model (LLM) called Bedrock, which allows customers to create custom chat algorithms along the lines of ChatGPT, but trained on their own data.

Image source: Getty Images.

Amazon’s pick-and-shovels take on artificial intelligence could shield it from some competition from the consumer-facing opportunity. And the fact that these new offers AI are integrated in the AWS platform could serve as an economic moat, making AWS a one-stop shop for all of a customer’s cloud-related needs. Segment revenue up 19% year after year to $26.3 billion, while operating income rose 72% to $9.3 billion.

What can we expect in the next few years?

While Amazon’s e-commerce and cloud computing businesses are looking stronger as ever, the next 12 months could present some challenges. Data analysis company Statista gives the US economy a 52% chance of entering recession by May 2025.

Even if there is no recession, the cracks are starting to form in the AI ​​growth narrative as consumer-facing start-ups fail to justify their infrastructure spending with revenue and revenue. According to Morgan Stanley analyst Keith Weiss, the industry is debating whether these companies will ever be able to monetize these algorithms given huge capital amount expenses necessary to train and lead them.

With a the forward price-earnings ratio (P/E) multiple of 35, Amazon stock trades at a modest premium to NASDAQ 100 estimate of 28. This might be a bit high given the near-term challenges they face. In the long run, Amazon is still a winner. However, investors may want to wait for a better price before taking a position in the stock.