Should you invest in a trillion-dollar stock? On the one hand, any stock reaching that status demonstrated winning results and surely made some millionaires along the way. Winners keep on winning and all that. On the other hand, how high can a trillion-dollar stock go? Can it double at such high levels?
Amazon (AMZN 1.43%) is one of an exclusive cadre of trillion-dollar companies that's been one of the best stocks ever to own. It has a current market cap of $1.8 trillion. Is it too late to buy?
Don't look back, look forward
The more sales a company makes, the harder it is to produce a high rate of increases. For example, two companies might make $100,000 in a quarter. Company A made $50,000 last year, so this was a 100% increase. Company B made $99,000 last year, so this was only about a 1% increase.
Amazon is the second-largest company in the U.S. by sales, behind only Walmart. It took in $575 billion in 2023, yet that was a 12% year-over-year increase. That's incredible.
For comparison, Walmart's fiscal 2024 sales increased 6%. The next largest companies are ExxonMobil and Apple, whose sales decreased in 2023, with UnitedHealth Group rounding out the top five with a 15% sales increase.
NASDAQ: AMZN
Key Data Points
Amazon has been able to achieve double-digit increases almost consistently, a real feat considering its size. It has done this by sticking to its "day one" culture of constantly challenging itself to innovate, which means entering new businesses and rethinking how it does old ones. So e-commerce, its original business, is refined through an improved logistics network and artificial intelligence, including robotics.
Due to the regionalization of warehouses and the development of more same-day facilities, Amazon's same- or next-day fulfillment in the U.S. increased 65% year over year in the fourth quarter. Getting products to customers faster results in more customer satisfaction, higher customer reliance on Amazon, and more sales. At Amazon's size, incremental progress adds up to millions of dollars in growth.
It's also adding millions of products every quarter to increase selection and make it the go-to source for everything customers need. Combining these features truly created a powerhouse business that's well-positioned to keep generating higher sales.
Image source: Amazon.
On top of that, these improvements are leading to better cost efficiencies. Keeping products regional allows Amazon to get products to customers faster, and also cheaper, since they have to travel over fewer miles. In the fourth quarter, the cost to serve per unit decreased year over year by $0.45 in the U.S., while cost to serve globally per unit decreased for the first time since 2018.
Amazon's stock price is highly correlated with its operating income, the best indication of its overall profitability. Higher sales and lower costs leads to more operating income, better margins, and ultimately, to higher investor confidence and stock price.
The world is Amazon's oyster
Let's not forget about the rest of Amazon's large business, with Amazon Web Services (AWS) leading the pack. AWS is the largest cloud computing business in the U.S., with a 31% market share; that means a third of all cloud computing business goes into Amazon's pocket.
This is a high-margin business that also contributed to strong operating income. Even at decelerated rates, AWS is gaining clients and reporting higher sales. In a rebounding economy, growth should accelerate again, and AWS should be able to keep its top spot.
Amazon is also growing its presence in streaming, healthcare, and other businesses. Any of these could become Amazon's next breakout business.
Can Amazon stock go higher?
Amazon is the second-largest company in the U.S. by sales but the fourth-largest by market capitalization. It's not easy to ignore the size of the current market cap and imagine it continuing to grow, but you should. Amazon stock has gained 76% over the past year, meaning it has come close to doubling from an earlier market cap of $1 trillion. If it continues to demonstrate growth, bring new products to market, and dominate its industries, it can still go higher.
