Amazon‘s (NASDAQ: AMZN) stock has risen more than 80% over the past 12 months as the bulls have looked past its near-term challenges. However, its stock remains nearly 20% below its all-time high, and looks cheap at 2.5 times next year’s sales.

As a longtime Amazon investor, I believe its stock could double within the next three years if four things happen: its e-commerce business stabilizes, its cloud business accelerates again, its advertising business expands, and Rivian Automotive‘s (NASDAQ: RIVN) stock finally recovers. Let’s see if Amazon can achieve those goals and impress the bulls again.

Its e-commerce business must keep growing

Amazon’s international business grew faster than its North American segment in 2020 and 2021, but it experienced a tougher slowdown over the past two years as the macro headwinds rattled the retail sector.

Data source: Amazon. YOY = Year-over-year.

However, Amazon’s international revenue growth actually accelerated throughout the first three quarters of 2023 as it expanded into more emerging markets. Its North American business also stabilized with 11% year-over-year growth throughout all three quarters as it benefited from its regional logistics upgrades and an influx of third-party sellers.

Investors should see if Amazon’s North American business can keep growing as it accelerates the expansion of its international business. That stabilization should counter the bearish perception of Amazon as an aging e-commerce giant.

Its cloud business needs to accelerate again

Amazon Web Services (AWS) is already the world’s largest cloud infrastructure platform, but it faces fierce competition from Microsoft‘s Azure and Alphabet‘s Google Cloud Platform (GCP). That competitive pressure, along with slower cloud spending in the challenging macro environment, caused AWS to experience a significant slowdown over the past two years.

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Data source: Amazon.

AWS is growing slower than Azure or GCP, but its year-over-year revenue growth stabilized at 12% over the past two quarters. It attributed that stabilization to new customer wins and the rollout of more tools for creating generative AI apps.

During its latest conference call, CFO Brian Olsavsky said that while companies were still focused on optimizing their cloud spending, those optimization rates were gradually slowing down. Therefore, investors should expect AWS’ growth to accelerate again over the long term — and its superior economies of scale should keep it well ahead of Azure and GCP.

AWS’ acceleration is crucial for Amazon’s broader recovery, because it operates at much higher margins than its e-commerce businesses. Its recovery should subsidize the growth of its lower-margin e-commerce marketplaces and enable it to lock in its Prime members with steep discounts, free shipping, and other loss-leading perks.

Its ad business must become a key profit engine

Amazon’s integrated ads and promoted listings across its e-commerce marketplaces make it one of the world’s largest advertising companies. It’s a sticky ecosystem that drives its third-party sellers to buy more ads to stay ahead of the competition, and that higher-margin revenue enables it to execute its lower-margin e-commerce strategies.

Amazon’s ad business thrived during the pandemic, but it cooled off in 2022 as the tough macro environment drove companies to rein in their spending. However, the segment recovered in 2023 as its e-commerce marketplaces stabilized.

Data source: Amazon.

Amazon’s ad revenue only accounted for 8% of its top line in the first nine months of 2023, but this growing and oft-overlooked business could eventually complement AWS as a secondary profit engine to boost its long-term margins.

Rivian’s stock must recover

Lastly, Amazon’s big investment in the electric vehicle maker Rivian, which currently trades 70% below its IPO price, caused it to turn unprofitable in 2022. Rivian’s business stabilized over the past year, but its stock remains in the penalty box as investors fret over its missed production targets, rising debt, and steep losses.

Nevertheless, Rivian still expects to produce 52,000 vehicles this year, it holds a long-term contract to produce 100,000 electric delivery vans for Amazon, and its stock looks cheap at three times next year’s sales. If Rivian successfully ramps up its production and its stock skyrockets, Amazon’s net profits will soar.

Why Amazon’s stock could double

Analysts expect Amazon’s revenue to expand at a compound annual growth rate (CAGR) of 11% from $514 billion in 2022 to $710 billion in 2025. If it grows another 11% in 2026, its annual revenue could reach $790 billion.

If we multiply that total by its current price-to-sales ratio of 2.5, Amazon would be worth $1.98 trillion by 2026 — which is only 25% higher than its current market capitalization. But if the bulls revalue Amazon as a tech stock instead of a retail one, it could be worth some $3.2 trillion — or nearly double its current market cap — at just four times sales. That sounds like an easy target if it can grow its core businesses as it waits for Rivian’s stock to take off.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool has a disclosure policy.

This Behemoth Stock Could Skyrocket 100% in 3 Years — Here’s How was originally published by The Motley Fool