The market is currently valuing Amazon (AMZN 2.50%) at a whopping $1 trillion. That's a staggering sum and an achievement that only an elite few businesses can claim.

Yet, incredibly, there's a strong possibility that the retail and cloud computing juggernaut will triple in value over the next half-decade. Here's why.

1. Amazon Web Services is a profit-generating machine

The cloud computing industry will grow by 14% annually and exceed $1.5 trillion by 2030, according to Grand View Research. As the leading provider of cloud infrastructure services, Amazon stands to gain from this megatrend more than any other company.

Amazon Web Services, or AWS, is already one of Amazon's most profitable businesses, with operating margins in the range of 24% to 35% in recent quarters. AWS is also expanding at an impressive clip, with revenue up 20% year over year in the fourth quarter.

Amazon generated net sales of $149 billion in the fourth quarter of 2022, with solid growth across several of its major business segments.

Image source: The Motley Fool.

If AWS can maintain its leading market share and track the cloud market's projected annual growth rate of 14% in the coming years, its revenue would reach $154 billion by 2027. If it can also continue to generate an operating margin of roughly 25%, its operating income would check in at about $38.6 billion at that time.

To obtain a reasonable valuation for these earnings, we can look to Microsoft. The cloud software colossus has typically traded at a price-to-operating-earnings ratio of between 24 and 30 over the past five years. 

Another valuation approach we can use is the price-to-earnings-to-growth (PEG) ratio. I'd argue that AWS -- a dominant cloud platform that is likely to only grow in importance as more organizations digitize their operations -- deserves to trade at a premium valuation of up to 2 times its growth rate. Thus, with its projected growth of 14%, a multiple of 28 would be reasonable. Multiplying my operating income estimate of $38.6 billion by 28 would produce an estimated value of nearly $1.1 trillion for AWS in five years' time. 

2. E-commerce provides more ways for investors to profit

Amazon, of course, is also a dominant e-commerce marketplace, so it's particularly well positioned to benefit as more retail sales shift online. Worldwide e-commerce transactions are slated to increase by roughly 9% annually to more than $8 trillion by 2026, according to eMarketer. 

Amazon is reportedly culling its first-party products as it prioritizes profitability, so I'm going to take a more conservative view and project 5% annual revenue growth for its online stores. However, Amazon's third-party seller business is likely to grow faster than the overall e-commerce market, as it rolls out new services like Buy with Prime. So, I will assume 10% annual sales growth for this segment. Together, this would see Amazon generate roughly $280 billion in online store sales and $190 billion in third-party seller services revenue annually by 2027. 

Amazon's online stores have been racking up losses in recent quarters, as inflation and recession fears have taken a toll. But CEO Andy Jassy is squarely focused on cutting costs -- including trimming the company's workforce, slowing the expansion of its fulfillment network, and shuttering unprofitable projects -- to boost profitability. I also expect Amazon's investments in automation to produce further efficiency gains. Thus, I believe Amazon's operating margin for its online store segment could improve to 3%, which would be a bit lower than the 3.3% to 3.5% margins Costco, Target, and Walmart currently enjoy. That would see Amazon's online store division generate approximately $8.4 billion in operating income by 2027. 

Amazon does not yet report operating margins for its third-party seller business. Peeking at United Parcel Service's operating margin of nearly 13% is informative here, but it's not a perfect comparison, due in part to the intriguing potential of Buy with Prime and Amazon's broader array of services. Still, to be somewhat conservative, I will project a 10% operating margin for Amazon's third-party seller segment by 2027, which would result in nearly $19 billion in operating income. 

As for price-to-earnings (P/E) ratios, we can again look to Costco, Target, and Walmart for our comparables. These retailers are currently trading for 28, 20, and 20 times operating earnings, respectively. I'll use the low-end figures here and apply a 20 multiple to Amazon's projected operating income of $8.4 billion, which would result in a value of $168 billion for its online store division. 

We can use UPS again as a comparable for Amazon's third-party business, though we need to make some adjustments. Amazon is taking share in the logistics injury and growing much faster than UPS. The retail giant also has a proven ability to successfully launch new e-commerce services for its merchants. So, although UPS has often traded in a range of 12 to 18 times operating earnings in recent years, I'd argue that Amazon's third-party business deserves a significantly higher multiple. I believe an operating P/E of 25 is more appropriate. That would value Amazon's third-party seller services division at $474 billion in five years' time. 

3. Advertising could be the most lucrative of all 

Amazon's e-commerce operations have also enabled it to capture nearly half of the retail media adverting market that's set to expand by 17% annually, to $130 billion by 2025, according to Morgan Stanley. By helping merchants profitably market their products to its massive user base, Amazon's ad network has become an indispensable partner to millions of online businesses. Therefore, I think Amazon could easily track the retail ad market's trajectory and grow revenue by 17% annually, which would place its ad sales at nearly $83 billion by 2027.

As with its third-party seller segment, Amazon has not yet disclosed its profit margins for its ad division. But Walmart chief financial officer John Rainey recently said the retail behemoth expects to enjoy margins as high as 70% to 80% on its fledgling ad network. I'll be a bit more conservative and assume that Amazon earns operating margins of 60% with its ad business. That would see the e-commerce leader generate advertising-driven operating income of nearly $50 billion by 2027. 

For P/E ratio comparisons, Alphabet (GOOG 0.81%) (GOOGL 0.72%) and Meta Platforms (META 2.26%) are instructive. Over the past year or so, these digital ad titans' operating P/E multiples have fallen to roughly 20. Investors' concerns regarding Meta's aggressive metaverse-related spending, and the risks posed by artificial intelligence to Alphabet's search dominance, have weighed on their stock prices. But prior to that, Alphabet's and Meta's operating margins typically ranged from the mid-20s to 30 or more. 

Moreover, Amazon is rapidly gaining share in the digital ad market, while Alphabet and Meta have seen their market share stagnate. Meta's ad-targeting capabilities were weakened by Apple's user privacy-related changes to its popular iOS and macOS software. Meanwhile, Alphabet's Google, which dominates most areas of search-based ads, has seen Amazon take the lead when it comes to e-commerce searches. 

Thus, I'd argue that Amazon's ad business deserves a premium valuation to its digital ad rivals. I believe an operating P/E of 30 is reasonable, which would value Amazon's ad segment at a stunning $1.5 trillion in five years. 

$1.1 trillion + $168 billion + $474 billion + $1.5 trillion = 

Add all that up, and you can see how it's entirely possible that Amazon's market value could exceed $3 trillion by 2028, and perhaps even sooner. That's also without assigning any value to Amazon's remaining business segments, which include its popular Prime membership program and subscription services, Whole Foods, and all of the e-commerce and cloud powerhouse's other growth initiatives.