Amazon (AMZN 3.43%) stock went on an incredible run over the last year. Since the start of 2023, shares of the technology giant are up over 102%, absolutely crushing the returns of the broad market indices and keeping up well with its "Magnificent Seven" counterparts. The e-commerce and cloud computing leader just posted another strong earnings report for the fourth quarter of 2023, with investors praising the company's combination of growth and expanding margins.
Today Amazon has a market cap of $1.77 trillion, making it the fourth-most-valuable company in the world. Even better, it looks like the party is just getting started for Amazon shareholders. Here's how much the Magnificent Seven stock could be worth by 2025.
E-commerce domination, reacceleration in cloud computing
Every part of Amazon's business was humming in the fourth quarter of 2023. North American net sales (e-commerce, subscriptions, and advertising) grew 13% year over year to $105.5 billion. International sales were up even more, posting 17% year-over-year growth and a $40 billion revenue level just in Q4. Lastly, Amazon Web Services (AWS), the company's cloud computing division, posted 13% revenue growth and is closing in on a $100 billion annual revenue run rate.
Investors likely were happy with the 13% year-over-year growth out of AWS, which has seen a large slowdown in revenue growth in recent quarters. 13% growth was an acceleration from Q2 and Q3 of last year, which indicates the cloud computing sector is coming out of a cyclical slowdown. We can thank the artificial intelligence (AI) revolution for this. Cloud computing providers such as AWS provide the servers that form the backbone of the computational-intensive generative AI tools that grew like gangbusters last year.
Importantly, Amazon is growing while also expanding its profit margins. Over the last 12 months, Amazon's operating margin has expanded to 6.4%. This number has grown every quarter since Q4 2022, when the company had a paltry 2.4% operating profit margin over the last 12 months. This is the main reason why Amazon's stock has soared in recent quarters.
Margin expansion is key
After finishing its rapid infrastructure buildout to support growth during the COVID-19 pandemic, Amazon finally started to expand its margins in 2023. But I think there is still room for the technology giant to get its profit margins to above 10%, and perhaps even much higher.
Why? Because the company now has a much more profitable revenue mix than before the pandemic. AWS is now 15.6% of net sales and sports an operating margin close to 30%. Perhaps more important will be Amazon's advertising division, which grew revenue 26% year over year last quarter to $14.65 billion. Digital advertising has incredibly high profit margins, so the faster Amazon's advertising revenue grows, the more room it has to expand its overall margin. And there is still plenty of room to grow here. For example, the company just started including advertisements for shows streaming in Amazon Prime Video, which could further boost advertising revenue over the next few years.
In the first quarter of this year, Amazon is expecting sales to grow by around 10% compared to 2023. If it can keep growing sales by 10% annually in 2024 and 2025, it will generate $700 billion in revenue two years from now. Assuming profit margins can expand to 10%, that equates to $70 billion in annual earnings. In other words, about double what it produced in 2023.
AMZN Operating Margin (TTM) data by YCharts
What will Amazon's stock be worth in 2025?
$70 billion in earnings is nothing to sneeze at. This would make Amazon's earnings power similar to that of technology giant Alphabet. If we apply the S&P 500's average price-to-earnings ratio (P/E) of 27 to this $70 billion in earnings, Amazon's stock would have a market cap of $1.89 trillion in 2025. This is slightly higher than the current $1.77 trillion valuation. While this might not get people overly excited, I think investors will value Amazon at an above-market multiple in 2025 due to the fact it continues to grow faster than the average business and will still have room to expand margins after 2025. At a P/E of 35, Amazon would generate a market cap of approximately $2.5 trillion.
To be clear, there are a lot of assumptions here that are not guaranteed to come true. It is virtually impossible to predict exactly what Amazon stock will be valued at in 2025. However, by understanding its underlying business fundamentals, its potential for growth, and its rapidly expanding margins, investors can be confident that Amazon stock will be worth much more in the future.
It looks like the best years are still ahead for this technology giant.
