Tesla (TSLA 4.96%) and Amazon (AMZN -1.65%) are two of the largest companies in the world. Both stocks have put up phenomenal returns for investors since going public, with the electric carmaker up 12,800% and the e-commerce/cloud company up 122,000% all-time. But if you own the stock today or are thinking of buying shares, prior returns are not what matters. It is about looking forward and identifying which stocks have the best chance of performing well for shareholders over the next five, 10, and 20 years.
So which stock is more likely to 5x first: Tesla or Amazon? Let's compare the prospects of these two mega-cap stocks.
Two huge market opportunities
The first thing we need to do when comparing Amazon and Tesla is to look at the potential market opportunities for these industry leaders.
Tesla is the largest electric vehicle (EV) manufacturer worldwide, selling just under 1 million units in 2021. It is set to grow its production substantially this year and for the rest of the decade as well. As the leader in EVs, Tesla is in a pole position to capture a lot of consumer spending in the sector over the next few years. By 2030, analysts expect the EV industry to reach annual sales of $800 billion. If Tesla can maintain its market lead this decade, the company should be on pace to do a few hundred billion in annual revenue. And this is before factoring in its renewable energy and battery storage ambitions as well.
Looking at Amazon, the market opportunity is even larger. This is due to the company dominating two gigantic industries: e-commerce and cloud computing. The e-commerce market just in the United States is projected to hit over $1.3 trillion by 2025. Amazon not only operates in these markets but other large economic regions like Europe, Japan, and India. Adding these countries into the fold, it is possible the online shopping addressable market for Amazon will hit over $2 trillion sometime this decade.
With the cloud, Amazon has dominated the industry since it essentially invented the service when it launched Amazon Web Services (AWS) almost two decades ago, with an estimated 32% market share. By 2030, analysts expect the cloud to reach over $1.5 trillion in annual spending. If AWS can retain or even if it loses a bit of market share, the segment should be doing hundreds of billions in sales by 2030.
Profit margins, competition, and valuation
Market size is important, but I want to explore three other relevant topics when comparing Tesla and Amazon: profit margins, competition, and valuation.
The EV and e-commerce segments of Tesla and Amazon's businesses have low-to-average margins. Last quarter, Tesla had an operating margin of 17.2%, which I wouldn't expect to head much higher due to capital intensity and heavy labor costs needed to manufacture cars. Amazon's e-commerce business is actually losing money right now, but that is due to some temporary fluctuations caused by the COVID-19 pandemic.
In 2019, before the pandemic, Amazon's e-commerce business had a profit margin of 4.1%, which is still quite low. However, AWS has phenomenal profit margins (32% through the first half of 2022) and should drive the majority of Amazon's earnings this decade. For example, if the segment reaches $300 billion in annual revenue, it will generate over $100 billion in operating income each year at its current margin level.
Amazon has minimal competition within both its e-commerce and cloud businesses. No other e-commerce seller has the logistics, fulfillment, and delivery capabilities of Amazon, and the cloud market only has a few scaled players like Google, Microsoft, and Oracle. Tesla, on the other hand, has dozens of competitors investing in EVs around the globe who will probably spend hundreds of billions of dollars to build out their manufacturing capabilities through 2030. This flood of supply should make the market more competitive for consumer EV purchases, which might drive down Tesla's profit margins.
Lastly, Amazon's stock has a cheaper valuation than Tesla's. Looking at forward enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiples, Tesla trades at 32.7 while Amazon trades at 16.8. EV/EBITDA is not a perfect metric, but it is the best apples-to-apples comparison for these businesses since Amazon's net income is close to zero today. This means that investors in Tesla need to demand more earnings growth than the equivalent Amazon investor in order to get the same returns owning the stock.
AMZN EV to EBITDA (Forward) data by YCharts.
The verdict
Tesla has a large market opportunity and has significantly grown its production and earnings over the last few years. But with the profit margins of AWS, less competition, and the cheaper valuation, I think Amazon wins handily as the stock seems likely to rise 5x from today's market value long before Tesla does.
