Amazon (AMZN -0.75%) threw around a lot of big numbers in its fourth-quarter update last week. The biggest of the bunch was the company's revenue of $514 billion last year. Amazon generated annual sales greater than the market caps of all but eight members of the S&P 500.
But there was one metric that the company's management mentioned that is arguably the most important for investors. And I think that one number makes Amazon stock a no-brainer buy right now.
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AWS' huge opportunity
Amazon CEO Andy Jassy noted in the company's fourth-quarter conference call as much as 95% of global information technology spending remains on-premises instead of in the cloud. But he suggested that the "equation is going to shift and flip."
Jassy doesn't expect all organizations will move their IT operations to the cloud. However, he thinks that most apps and data will transition away from on-premises over the next 10 to 15 years.
That translates to a huge opportunity for Amazon Web Services (AWS), Amazon's cloud-hosting business. AWS has owned the No. 1 spot in the cloud market from the beginning. It claimed a market share of 33% in the fourth quarter of 2022, according to Synergy Research Group. That's well ahead of the closest rival, Microsoft, which had a market share of 23%.
AWS generated nearly 13% of Amazon's total net sales in Q4. It's by far the biggest growth driver and the most profitable segment for the company with an operating margin last year of over 28%. When Jassy looks at the 95% of IT spending that's still on-premises, he knows it means that AWS has a potentially massive growth runway ahead.
Crunching the numbers
But just how big is that massive growth runway? Let's crunch some numbers.
AWS raked in a little over $80 billion in net sales last year. Using Synergy Research Group's market share figure, that figure implies that the overall cloud hosting market totaled around $240 billion. Let's assume that Jassy is correct that roughly 95% of IT spending is still on-premises. If so, there's a total market opportunity in the ballpark of $4.8 trillion.
Jassy is no doubt right that on-premises IT will never completely go away. However, what if he's also right that the percentages will flip with 95% in the cloud and 5% on-premises 15 years from now? That would mean the cloud-hosting market could top $4.5 trillion by 2038.
Now for the really fun part. Let's say that AWS is able to retain a 33% market share. If it can, the business could be on track to make around $1.5 trillion per year by the second half of the next decade. That's almost three times the amount of revenue that Amazon's entire operations generated in 2022.
Remember, too, that AWS is Amazon's most profitable unit. Earnings would grow even faster than revenue would in this scenario. There's one more thing to note: We're not factoring in any overall market growth. Zilch. These numbers would be even more encouraging with only a modest growth rate.
A no-brainer buy
Do you want to know what I especially like about this 95% number mentioned by Jassy? He could be way off and Amazon would still have a tremendous opportunity ahead. AWS could lose incremental market share to Microsoft and others and that would still be true as well.
I also like that focusing on just one number doesn't make other important numbers irrelevant. For example, e-commerce made up only 14.1% of total U.S. retail sales in the third quarter of 2022. That represents a huge remaining growth opportunity for Amazon's core e-commerce business. And we still haven't touched healthcare, home automation, advertising, groceries, self-driving car technology, or any other markets that Amazon is either currently in or could move into.
There's a simple term for a stock that's (a) the clear leader of a super-fast-growing market, (b) has multiple other major growth opportunities, and (c) trades at more than 40% off of its previous high. That term is... a no-brainer buy.
