Amazon (AMZN +0.81%) stock might be down 44% from its all-time high right now, but it's still the fifth most valuable company in the world, with a market capitalization of $1.06 trillion. It's trailing its American peers in the technology sector, like Apple (AAPL +0.29%), Microsoft (MSFT +0.03%) and Google parent Alphabet (GOOGL -0.96%)(GOOG -0.88%), yet in 2022, Amazon generated more revenue than all of them.
It operates an incredibly diverse business and is dominating some of the most important areas of the technology industry. With that in mind, there's a clear path for Amazon to achieve a $5 trillion valuation in the next 10 years. If it gets there, investors who buy its stock today would earn a whopping 371% return.
NASDAQ: AMZN
Key Data Points
Amazon: Its past and future
Amazon is a widely recognized pioneer in the e-commerce industry. It began selling books online in 1995 and has never looked back. Its website is now home to millions of different products and generated $220 billion in sales in 2022 alone. But the company's expansion into other areas has supercharged its growth.
It's now a leader in the cloud computing industry through its Amazon Web Services (AWS) platform, which helps business customers with their digital transformations. It began as a way to help companies store their data online in 2006 and now offers hundreds of solutions, including advanced artificial intelligence and machine-learning tools. Last year, AWS delivered $80 billion in revenue and is consistently responsible for all of Amazon's operating income.
The cloud attracts more spending from businesses each year as the number of tasks it can migrate online continues to grow. The industry was worth $484 billion in 2022, and an estimate by Grand View Research suggests it could become a $1.5 trillion annual opportunity by 2030.
But Amazon hasn't stopped there. It now reports its advertising revenue as a stand-alone line item (it was once reported under its retail business), and much to investors' delight, it generated $37 billion in revenue last year. Amazon.com is the primary driver, with 2.2 billion monthly website visits, which makes it an ideal place for merchants to market their products.
However, thanks to Amazon's growing portfolio of media assets like streaming -- which includes live sports from the NFL to European soccer -- its ad business might just be getting warmed up. According to Microsoft, digital advertising is a $500 billion annual opportunity, so Amazon has barely scratched the surface.
Amazon attracts more revenue than Apple, Microsoft, and Alphabet
In 2022, Amazon generated $514 billion in total revenue. That was more than Apple ($394 billion), Microsoft ($198 billion), and Alphabet ($282 billion). So why have those three companies attracted higher valuations? In the case of Apple and Microsoft, they're worth more than twice as much as Amazon.
Amazon has typically balanced growth and profitability really well, but unfortunately, due to a paper loss in 2022 on its passive investment in electric-vehicle maker Rivian Automotive, the company delivered its first annual net loss since 2014. That sets it apart from its three tech-giant peers because they all have consistently delivered a profit, even in this difficult economic climate.
Additionally, investors fear there could be a global economic recession on the horizon. Consumers typically suffer the most in those circumstances. Since Amazon is heavily reliant on e-commerce, sales could suffer a slowdown.
Plus, growth in AWS has slowed over the last few quarters. Since that segment is the profitability engine behind Amazon, as a whole, investors might be preparing for sluggish earnings results. However, AWS should be able to use its leadership position to capture an outsized share of the enormous growth forecast for the cloud computing industry over the longer term.
Image source: Getty Images.
Amazon's (mathematical) path to a $5 trillion valuation
Since Amazon didn't generate positive earnings (profit) last year, let's focus on its price-to-sales (P/S) ratio as a valuation metric. This is calculated by dividing the company's current market value of $1.06 trillion by its 2022 revenue of $514 billion.
Based on that equation, its P/S ratio is 2.1 right now. Assuming it remained constant for the next 10 years, Amazon would have to generate $2.5 trillion in revenue in 2033 to justify a $5 trillion valuation. It would have to grow its revenue by 17.1% each year between now and then to achieve that number.
The good news is, since the company's initial public offering (IPO) in 1997, it has grown its revenue at a compound annual rate of 38.5%. That's well above the threshold, but more recently, its revenue growth rate in 2022 was just 8.4% and is expected to come in at 12.4% this year. Granted, that's in the middle of an incredibly difficult economic environment.
Therefore, two pathways could take Amazon to a $5 trillion valuation. First, it might find its e-commerce revenue reaccelerating once the economy improves. Plus, its growth rate could be bolstered by greater cloud adoption and through the expansion of its digital-advertising business.
Second, there's a phenomenon referred to as multiple expansion. Amazon stock has declined so steeply amid the broader tech sell-off that its P/S ratio is near the cheapest levels in nine years. It traded as high as 4.6 in 2020. If it climbs back to that level, Amazon will only need $1.1 trillion in revenue by 2033 to justify a $5 trillion valuation.
Amazon's business mix is dominated by industries of the future, so it has the firepower to deliver robust growth for the decade ahead. But it will likely get some help from an improving economy, which should see Amazon stock attract a higher valuation, especially if the company returns to profitability (as is expected). All in all, there could be exciting gains on the table for Amazon's shareholders.
