With its shares up 23% year to date, Amazon (AMZN -0.09%) has finally bounced back from its post-pandemic slump. The recovery hinged on streamlining its e-commerce business and pivoting to exciting new growth drivers like artificial intelligence (AI).

Let’s explore how these dynamics can continue to unfold over the next three years.

A leaner and meaner Amazon

While layoffs and cost-cutting can invoke a feeling of dread for middle managers and other replaceable employees, they can be great news to investors who want a more streamlined and profitable company. For Amazon, these controversial efforts are delivering in a big way.

The company’s first-quarter revenue increased by a modest 13% year over year to $143.3 billion, but operating income surged more than 200% to $15.3 billion. Many of these improvements came from unlocking efficiencies in North American and international e-commerce, which had previously suffered from weak margins because of pandemic-era overexpansion under Amazon’s former CEO, Jeff Bezos.

The new CEO, Andy Jassy, is extensively cutting costs. He also isn’t just chasing short-term profits.

And Jassy is refocusing the company on what historically made it so successful in the first place: the customer experience. In the first quarter, Amazon achieved its fastest-ever delivery speeds, with nearly 60% of Prime members’ orders arriving within two days in the country’s 60 largest metro areas.

And in major international cities including London, Tokyo, and Toronto, three out of four items arrived within two days.

Investors shouldn’t expect the massive e-commerce business to be a big growth driver over the next three years. But the company can leverage its scale and operational efficiencies to maintain its dominant position, keeping customers satisfied while delivering reliable profits to investors.

Medium-term growth drivers

Over the next three years, the company’s prospects will depend on how well it can monetize generative artificial intelligence (AI). It has developed a picks-and-shovels business model that provides the computing power and foundational models for its Amazon Web Services (AWS) clients to build consumer-facing applications.

Image source: Getty Images.

First-quarter AWS sales jumped 17% year over year to $25 billion. And the cloud computing segment continues to contribute an outsize share of Amazon’s operating income, with $9.4 billion of the $15.3 billion (63%) generated in the period.

New AI-related services like Amazon Bedrock — which allows AWS clients to build consumer-facing AI applications using the provided foundational models — will help power continued growth.

The company is also integrating AI into other aspects of its business, including customer service; image generation for ads; and the Alexa virtual assistant, which it plans to update with AI features and re-release this year for a monthly subscription fee. None of these efforts will make a big impact alone, but they could create a flywheel effect, with many small wins compounding on one another to generate significant momentum.

Is Amazon stock a buy?

With its forward price-to-earnings (P/E) ratio of 40, Amazon stock is more expensive than the Nasdaq 100 average of 31, which is a large premium to pay for a mature company that is no longer rapidly scaling up its business.

With that said, Amazon’s ongoing cost-cutting could lead to continued profitability improvements, even as growth in e-commerce sales slows. The company’s cloud computing division, AWS, also remains an exciting opportunity for high-margin expansion. Thus, shares look capable of outperforming the market over the next three years.