Where will Amazon inventory be in 3 years?

Actions of Amazon (AMZN -1.67%) are up 12% over the past three years, recently surpassing an all-time high set in 2021. But did you know the stock has significantly underperformed S&P 500 index on that time frame? That’s right: The overall market index is up 34% over the past three years, easily outpacing e-commerce and cloud computing company returns.

This is one of the longest periods of underperformance in Amazon’s history. However, if we look at the underlying financials, the company is doing phenomenally well. Revenues are growing by double digits, with higher profit margins. If this continues, where does that put Amazon stock three years from now?

Let’s dig further and find out.

The big drivers of revenue growth

Last quarter, Amazon’s revenue rose 10% year over year to $148 billion. It is one of the largest sales generators in the world due to its dominance in e-commerce in the United States and several other markets around the world.

And let’s not forget the cloud computing division, Amazon Web Services (AWS). It generates about $100 billion in revenue each year and grew sales by 19% year over year last quarter.

Investors should expect continued growth from both divisions due to tailwinds for each. E-commerce still accounts for only about 16% of total retail sales in the United States. While not every transaction is online, the trend has been up and to the right for decades and shows no signs of slowing down. Amazon stands to benefit as overall retail spending rises in the United States and e-commerce eats up more of that pie.

For cloud computing, the situation is similar. It remains a small percentage of total IT spending, with analysts projecting total sector annual growth of 19.4% from 2024 to 2028. This is another tailwind for the company.

Add it all up, and I think it’s possible for Amazon to grow its total revenue by 10% per year over the next three years, if not more.

Continued margin expansion

Combined with the revenue growth, Amazon is seeing good margin expansion as both its e-commerce and cloud computing divisions expand. The operating margin in the last 12 months reached 9%, which is an all-time high.

Three key segments drive this margin expansion with their high profitability. We already talked about one: AWS. It has operating margins of over 30% and is growing faster than total sales. The other two segments are third-party vendor services (up 13% year-over-year) and advertising (up 20%).

All these three segments come with better profit margins than the traditional e-commerce business. If these three segments continue to grow faster than total sales, Amazon’s operating margin will continue to expand over the next three years.

In addition to rapid growth in its high-margin segments, Amazon has cut its workforce. Various divisions had layoffs in 2023 and 2024, which should lead to even more profit growth.

AMZN Revenue (TTM); data by YCharts. TTM = last 12 months.

A three-year profit inflection

At Amazon, we have a dual driver of earnings growth: sales and operating margin expansion. Over the next three years, I expect consolidated revenues to grow at least 10% annually. Profit margins should expand to at least 15% from 9% currently.

In the last 12 months, revenue was $604 billion. With 10% compound annual revenue growth over three years, the company will generate $804 billion in sales in 2027. Apply a 15% profit margin to that number, and you have $120 billion in annual operating income. Over the past 12 months, Amazon has generated operating income of around $50 billion. So earnings will double over three years.

We cannot accurately predict what the share price will do in the next three years. But if the company doubles its operating earnings — which I think is very possible given the estimates above — shareholders will likely be happy to buy and hold Amazon for a long time.

As this profit inflection occurs, watch its stock price climb higher and higher for the rest of this decade.