It is rare to find a company that has a dominant market-leading position in not one, but two completely separate industries, but Amazon.com (AMZN 0.75%) is in that category. Its e-commerce platform is larger than its next 10 competitors combined, and Amazon Web Services (AWS) has a strong lead over the other major cloud platforms.
As my colleague Sean Williams pointed out in a recent article, no fewer than eight billionaire investors scooped up shares of Amazon in the fourth quarter of 2023, including Citadel's Ken Griffin. And it isn't just a recent phenomenon -- Warren Buffett-controlled Berkshire Hathaway owns shares of Amazon, as do notable billionaires David Tepper and Stanley Druckenmiller.
Now, I would never suggest buying a particular stock just because billionaires are buying it, but there is a lot to like about Amazon. I've added shares to my own portfolio several times in the past couple of years, and I believe patient investors will be rewarded by this impressive business.
Recent results are strong
In its latest earnings report, Amazon looked extremely strong. It handily beat expectations on both the top and bottom lines, and thanks to CEO Andy Jassy's focus on efficiency, the company's net income jumped to $10.6 billion, compared to a $278 million profit in the fourth quarter of 2022. Revenue was 14% higher year over year, fueled by a particularly solid holiday season.
Amazon's business expanded nicely all around. Amazon Web Services (AWS) growth accelerated by 1 percentage point sequentially, while North America and international e-commerce sales increased 13% and 17%, respectively. It's important to note that while nearly 85% of Amazon's revenue comes from e-commerce, AWS is responsible for the majority of the company's operating profits.
Advertising also continues to be an impressive high-margin revenue stream, with ad revenue jumping 27% year over year in the fourth quarter. Plus, it's worth noting that Amazon just started showing ads on Prime Video content in January, so this could keep growing rapidly.
Lots of growth potential ahead
There could be tremendous growth potential on both sides of Amazon's business. For starters, e-commerce only makes up about 15% of U.S. retail sales, and this percentage is even lower in some of the international markets where Amazon operates. And there's plenty of long-tailed potential to expand the advertising business.
On the AWS side, the global cloud computing market is expected to quadruple from 2023 levels by the end of the decade, becoming a $2.4 trillion market by that point.
AWS could have an especially big opportunity as generative AI technology evolves. Management said that there has been a lot of interest in AWS' generative AI products, such as its "Q" chatbot for businesses, and Jassy said that AI could drive "tens of billions of dollars" in revenue over the next few years. Amazon develops its own AI chips and has a platform to build AI applications, among other initiatives.
Furthermore, it isn't just that Amazon's business has lots of room to grow. It also has ample opportunity to improve efficiency and expand its margins, especially on the e-commerce side. The rapid growth of advertising should certainly help, and Amazon is also making efficiency improvements in its fulfillment network. A continued focus on efficiency is a big priority for Jassy.
How big could Amazon get?
Amazon is one of the "Magnificent 7" companies, and with a $1.8 trillion market cap, it's one of the largest businesses in the world already. However, there's a solid case to be made that Amazon could double or even triple in size by the end of the decade if it can execute on both its growth and profitability opportunities. While there's a lot that can happen, I wouldn't be shocked to see Amazon ultimately become the first $5 trillion market cap company.
