Actions of Amazon (NASDAQ:AMZN) have nearly doubled over the past three years, raising the company’s market capitalization to approximately $2.6 trillion. Will the company be able to maintain its momentum and help the stock rise sharply again over the next three years?
The answer arguably depends above all on two things: whether Amazon Web Services (AWS), its cloud computing business, can continue to grow at the strong pace it has shown recently, and whether the huge sums the company is investing in artificial intelligence (AI) begin to pay off quickly enough to justify them.
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Here’s a closer look at Amazon’s underlying business and where I think the stock could be three years from now.
Cloud business accelerates again
Most people still think of Amazon as a giant online store. But its most profitable operation is AWS. What’s more, the segment is growing at a dizzying pace. AWS’s first-quarter revenue rose 28% year over year to $37.6 billion, its fastest growth in 15 quarters, hitting an annual run rate of around $150 billion.
Highlighting the segment’s impressive economics, AWS accounted for only about 21% of Amazon’s revenue in the quarter, but generated nearly 60% of the company’s operating income.
“It’s very unusual for a company to grow that quickly on such a large base,” Amazon CEO Andy Jassy said on the company’s first-quarter earnings call when discussing AWS’s growth rate.
Much of that reacceleration has to do with AI. Amazon said AI-related revenue within AWS now exceeds an annual rate of $15 billion, and its backlog stood at around $364 billion at the end of the quarter. And since the close of the quarter, the company secured a commitment of more than $100 billion from Anthropic, the artificial intelligence developer that Amazon has largely backed.
The rest of the business contributes too. Advertising revenue grew 24% to $17.2 billion in the quarter, a high-margin operation that quietly surpassed $70 billion over the past year. And the retail sector is becoming more profitable: Operating income in North America rose to $8.3 billion from $5.8 billion a year earlier, helping lift Amazon’s overall operating margin to a record 13.1%.
What could limit (or drive) the next three years?
All that growth, however, comes at a cost. Amazon expects to spend about $200 billion in capital spending companywide in 2026, much of it on data centers and AI chips. And the pressure that this expense puts on Amazon’s business is already noticeable. Over the past year, operating cash flow increased 30% to $148.5 billion. But trailing-12-month free cash flow fell to about $1.2 billion from $25.9 billion, while property and equipment purchases rose by about $59 billion. And this month a multimillion-dollar deal was closed with Corning (NYSE: GLW) Providing fiber for U.S. data centers is just the latest sign that costly construction continues to escalate. Amazon also recently disclosed a delayed term loan facility worth $17.5 billion.