2020 isn't even halfway over, but we can already crown Amazon (NASDAQ:AMZN) as one of the year's biggest winners.
Shares of the tech giant are already up 43% year to date, as it's emerged as a popular pick in the coronavirus era. Nearly all of its businesses seem to be benefiting from the crisis that's forced stores and offices to close, leading to increased demand for e-commerce, cloud computing, and video streaming. That 43% gain delivered an increase of about $400 billion in market cap, a larger value than almost any other U.S. company.
One analyst now thinks the stock could hit $5,000 over the long term, nearly doubling from its current price around $2,600. Needham analyst Laura Martin said the company would benefit from a "hidden value multiplier" that allows the company to expand into new and adjacent markets like groceries, media, and cloud computing. She also sees Amazon transitioning to a service provider based on higher-margin businesses like Amazon Web Services (AWS) and its third-party marketplace, and noted that revenue from services grew from 28% to 43% over the last five years. She values Amazon's media business at $500 billion and AWS at $560 billion, which alone almost account for the company's total market cap at $1.3 trillion.
It's easy to see why the market is so bullish about Amazon now. Its competitive advantages are evident, and it's in a golden position to snatch up market share during the pandemic. But can the stock still double from here, which would mean reaching $2.5 trillion? The better question to ask may be if anything can stop Amazon.
The law of large numbers
Amazon is now the second-biggest company by revenue in the U.S., behind only Walmart. The e-commerce champ generated $280.5 billion in revenue last year. That figure is set to jump again this year with many of its brick-and-mortar rivals shut down or debilitated from the pandemic, and e-commerce sales surging across the board. Sales rose 26% in the first quarter, and if the company can deliver full-year growth of 25% or more, it will finish the year with at least $350 billion in revenue.
However, adding $70 billion in new sales every year isn't so easy. Eventually, Amazon is likely to respond to the gravitational pull of math, as it can only grow so fast for so long. While investors have speculated whether the company's market value can make it to $2 billion, a better question might be if its revenue will one day reach $1 trillion, nearly double what Walmart, the world's biggest company by revenue, has today.
Amazon's need to feed its voracious growth appetite explains why the company has moved into areas like groceries and healthcare, giant markets that extend its growth runway. The company also benefits from competing in industries that are already seeing strong secular growth, like e-commerce and cloud computing, which means the company should have an easier time maintaining strong growth than the average company of its size.
Based on the company's valuation with a price-to-earnings (P/E) ratio above 100, investors are still expecting substantial growth from Amazon, especially as profits should ramp up from high-margin businesses like AWS and its third-party marketplace.
The regulatory threat
Amazon was expected to take 38.7% of e-commerce sales in the U.S. this year according to eMarketer, well ahead of second-place Walmart at 5.3%. With its Prime membership program, network of fulfillment centers, and third-party marketplace, the company has monopoly-like power in e-commerce, as it has no true peer in the U.S. Amazon has already attracted scrutiny for using data from its marketplace to compete with its third-party sellers, and the European Union is now planning to level antitrust charges at the company for just this reason.
Meanwhile, CEO Jeff Bezos also recently said he would testify to a House committee investigating potential antitrust violations by big tech companies like Amazon, Facebook, Apple, and Alphabet.
At this point, a full-on breakup of the company seems unlikely, but regulators could add restrictions to Amazon's ability to compete with its third-party sellers, and stand in the way of future acquisitions as well as its ambitions in new industries like healthcare.
The competitive landscape
After years of having the e-commerce space essentially to itself, Amazon's success and its threat to brick-and-mortar retail has finally attracted some substantial competition. Walmart has spent the last four years building out its e-commerce infrastructure with an impressive online grocery program and free one-day delivery, matching Amazon, but without a membership fee. Target has seen same-day fulfillment initiatives like Shipt and order pickup drive steady sales growth, and even Costco has experienced an e-commerce boom in recent quarters.
Meanwhile, Shopify, the e-commerce software guru that powers more than a million online sellers, is aiming to establish itself as an Amazon competitor, forging partnerships with Walmart and Facebook in recent weeks and launching its own consumer-facing shopping app called Shop.
While those companies and others are seeing impressive gains in e-commerce, it seems almost impossible at this point to undo Amazon's leadership in the category, given its locked-in customer base with Prime, logistics network, and third-party marketplace. In cloud computing, Microsoft's Azure has emerged as a rival, but the runway for growth in cloud infrastructure is still ample for both companies.
Amazon's recent stock appreciation is a reflection of the accelerated growth and market share gains that investors expect the company to reap from the coronavirus pandemic. With consumers now even more dependent on its e-commerce and cloud computing businesses, the company's future looks brighter than it was just a few months ago. While a doubling of the stock from here will take time, the opportunity is there based on the visible room for growth in its key businesses and Amazon's ability to ramp up profits.